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WASHINGTON (Reuters) - Business credit cards were a big help for Doris McMillon's communications consulting business, allowing her to buy supplies for workshops and coaching sessions weeks before her clients paid her.
But in 2009, when Chase jacked the interest rate on her whole balance from 9.9 to 23.9 percent, McMillon was outraged.
"You are a slave to the lender," she said, adding that keeping up with payroll, gasoline, and phone payments has become a struggle. Frustrated by her inability to make headway on the roughly $4,500 debt, McMillon recently used a pension payment from a prior job to pay it down.
"What some of these banks have done to small business owners is unconscionable," she said.
Since this story was first published, McMillon says Chase promised her a $300 credit and informed her she had made three late payments since she opened the account in 2007.
JPMorgan Chase, parent company of the Chase consumer and commercial banking unit, would not comment specifically on McMillon's case.
Roughly two years after the Credit Card Accountability Responsibility and Disclosure (CARD) Act banned arbitrary rate hikes and excessive fees for consumer credit cards, small business credit card users not covered by the legislation are still vulnerable.
Small businesses play a crucial role in an economic recovery as the major source of new jobs. The Obama administration has made small business growth a top priority, but proprietors say credit card practices are holding them back.
Drawn in by attractive rewards programs, special expense-tracking tools or difficulty getting other financing, many small business owners fail to recognize their cards have almost no consumer protections, though they are often held personally liable for their debts.
"All these practices that were recognized as deceptive and unfair by the (Federal Reserve) - and were codified as such by this legislation - are still being perpetrated against small business owners because their business credit cards aren't protected," said Todd McCracken, president of the National Small Business Association, an advocacy group. It is "just ridiculous."
Banks are still recovering from losses during the 2007-2009 credit crisis, and are facing restrictions on their activities because of heightened regulation.
The CARD Act alone swiped an estimated $11 billion from banks' annual revenue, according to card advisory firm RK Hammer.
As the economy slowly improves, banks are trying to drum up new business by ramping up credit card offer mailings. Strategies differ between banks, but some, including JPMorgan, are pushing business credit cards that come with more freedom to change the terms on customers.
Across the industry, the volume of household mailings for business credit cards rose 32 percent in 2011 to more than 186 million offers, with JPMorgan Chase, Capital One and American Express leading the pack, according to Ipsos, a global markets research firm.
A number of legislative efforts to extend consumer protections to small businesses have withered since the cards were first excluded from federal consumer protections over four decades ago.
"We have got to assist (small businesses) to make sure deceptive practices by credit card companies are not keeping them from going and hiring more people," said U.S. Representative Nita Lowey, a Democrat from New York who sponsored legislation last March to extend CARD Act protections to small businesses.
Small business owners have little chance of getting relief from the Consumer Financial Protection Bureau, which was created as part of the 2010 Dodd-Frank financial oversight law, because business credit cards are not technically consumer products.
Financial industry representatives say small business owners do not need the same protections that consumers do.
"The law is built on the assumption that people in business have a certain minimum sophistication and competence," said Nessa Feddis, vice president and senior counsel at the American Bankers Association, who added that extending the CARD Act to cover small businesses could further contract credit.
Credit cards are the most common form of credit for small businesses, according to the National Federation of Independent Businesses. Seventy-nine percent of small businesses use them. That is 3 percentage points more than in 2010, and 5 percentage points greater than in 2009.
The cards tend to carry higher interest rates than personal credit cards, with the largest number of small businesses reporting interest rates in the 15 to 19 percent range, according to the National Small Business Association. That compares to an average of 12.36 percent for consumer cards, according to the Federal Reserve.
But business credit cards offer higher credit limits, are often easier to get than loans or lines of credit, and some offer special perks like an expense tracking tool for employee cards or rewards geared towards small businesses.
"There are possible advantages," to business cards, said Josh Frank, a senior researcher at the Center for Responsible Lending, "but they have no value anywhere near what you lose in terms of lack of consumer protections."
Mary Darling, who owns an Arizona-based surveying business, said even those advantages can disappear quickly. Her business, Darling Environmental & Surveying, relies on a handful of business credit cards that her employees use to cover big travel bills.
In early 2009, Darling said she got hit by a double whammy, despite never having missed a payment. American Express and Chase suddenly boosted her interest rates by up to 2.25 points to 13.99 percent and cut her credit limits by up to 75 percent.
Darling was in shock.
"It puts our company at risk," said Darling, who sold a prized laser scanner, two trucks, and renegotiated her rent to raise cash. For the past two years, she has been struggling to cope with her constrained credit.
"On the one hand, they treat me like a consumer, on the other hand, when it's to their advantage, they treat me like a business," Darling said.
Chase and American Express would not comment specifically on Darling's case. But since Reuters began researching this story, Chase has restored Darling's credit limits to their prior levels.
Chase said a customer's interest rates can be increased for paying late, exceeding the credit limit or paying with insufficient funds. Those customers can have their rates reset to a lower rate if they remain in good standing for one year.
A May 2011 Pew study on business credit cards revealed that 10 of the 12 surveyed card issuers explicitly required business credit card applicants to be personally liable for all business account expenses.
"As soon as you have that personal liability clause, you are putting the person and their family's assets and financial well being at stake," said Nick Bourke, who authored the study.
Many small business owners fail to realize that they could use consumer credit cards to make business purchases and get all the protections afforded by the CARD Act, according to Bourke.
Other consumer advocates question whether business cards are being marketed inappropriately, citing anecdotal evidence that banks appear to be targeting customers with cards that come with fewer protections.
"If the card is sent to some residences in the consumer's name, really, should that solicitation have been for a business card?" asked Chi Chi Wu, an attorney at the National Consumer Law Center, who says business mailings should be sent to businesses only.
Banks say some small businesses operate from homes, and in any case they make efforts to establish an individual owns a business.
And some banks voluntarily apply various CARD Act protections to business cards, most notably Bank of America and Capital One.
For example, Bank of America applies the CARD Act's major provisions, including no rate increases on existing balances and a minimum of 25 days from statement closing to payment due date, according to Betty Riess, a spokeswoman.
Capital One's business card applies some as well, such as the allocation of payments to balances carrying the highest interest rates, and 45 days of advance notice on any rate changes on future balances, which Bank of America also applies.
JPMorgan Chase, whose business credit card mailing volume grew by 100 percent in 2011 according to Ipsos, has adopted a few provisions, such as 45-day notice for pricing and other changes, and fixed due dates each month.
Bourke said the banks need to do more. He said they should be required to at least disclose that their business credit cards do not carry the full protections of consumer counterparts.
"Wherever there is a significant loophole like this that allows harmful practices to continue, then they will continue, and they will harm people," he said.
Reporting By Alexandra Alper; Editing by Tim Dobbyn