Small businesses buried by credit card debt

The financial health of small businesses is deteriorating quickly, if Advanta Corp.'s earnings, released yesterday, are any indicator.

The issuer of small-business credit cards from Spring House said it gave up on collecting $130.5 million of its customers' debts in the second quarter, up from $102.1 million in the first quarter and $50.7 million a year earlier.

"The economy continues to challenge small-business owners and their ability to pay bills," said Dennis Alter, chairman and chief executive officer of Advanta, which last year was the fifth-largest credit card lender to small businesses, according to the Nilson Report.

Advanta has ratcheted back on growth while it tries to get a handle on troubled loans to its customers, which typically have 10 or fewer employees and less then $1 million in annual revenue.

Issuers of consumer credit cards, on the other hand, are still lending freely. Consumers had $962 billion due on credit cards in May, up from $897 billion a year earlier, according to Federal Reserve data. At the same time, the weak economy is causing more consumers to fall behind on their payments.

The entire credit card industry had a bad second quarter, but it is not going to get as bad as the debacle in the subprime-mortgage industry, David Robertson, publisher of the Nilson Report, an industry newsletter, said.

"The mortgage industry had no prior experience with a downturn when it had been so aggressive in giving mortgages to people in the subprime market. The credit card industry has been marketing subprime accounts for 20-plus years. It's already gone through two recessions," Robertson said.

"Having said that, the credit card problem has not yet peaked. It might not peak for two more quarters," he said.

Advanta is having a harder time collecting debt than the industry as a whole, which had a charge-off rate of 6.51 percent in June, according to a Keefe, Bruyette & Woods Inc. analysis of credit card securitizations.

Advanta's annualized charge-off rate was 8.4 percent in the quarter, up from 6.4 percent in the first quarter and 3.6 percent a year earlier.

That escalation in charge-offs was a big factor in Standard & Poor's decision yesterday to lower Advanta's own credit outlook to negative from stable.

Thanks to the sale of some of its MasterCard shares, Advanta reported a $4 million profit in the quarter, down 83 percent from $23.73 million in the same period a year earlier.

On a day when most financial stocks were up, Advanta's Class A common shares gained 87 cents, or 16.29 percent, to close at $6.21 on the Nasdaq. Its more widely held Class B shares closed at $7.14, up 91 cents, or 14.61 percent.