Advanta, With 20% Uncollectable Debt, to Shut Off Lending

--from nakedcapitalism Advante, the 12th biggest credit card issuer, is ceasing all new lending as of June 10. This is yet another example of how the credit contraction is hitting small businesses. Since the credit card industry is highly concentrated, Advanta is pretty small fry, with only $5 billion in outstanding credit. But that was devoted entirely to the small business market. We've noted earlier that credit cards are an important source of funding to small enterprises. Many are not large enough to qualify for a normal bank business line of credit. And businesses often have short term cash flow need, particularly if they have an employee or two. If a customer payment comes in a late, using a credit card to stretch short term expenses can be very valuable. We noted earlier that American Express had shut down its small business credit card area in December and January, which included a small business line of credit product. Advanta contends that 90% of its customers have access to other credit. That begs the question of whether it is sufficient. But even granting that it is, that leaves 10%, of companies that colllectively had access to $500 million of credit stranded. If you assume $20,000 per company, that's 25,000 businesses at risk. Advanta puts its number of customers at a million, so the number affected adversely could be 100,000. Now given Advanta's rather impressive losses: 20% uncollectable as of March 31. Note that this isn't a matter of the corporation being broke but the owner still having dough; small business credit cards are personally guaranteed by the business owner. But even though Advanta had colossally bad credit screening, it does not follow that all of its remaining customers are deadbeats.Nevertheless, the bank looks like it might be a goner, and it will probably take down some of its customers along with it. From Bloomberg: Advanta Corp., the credit-card issuer for small businesses, may leave 1 million customers scrounging to find new lenders and debt holders facing losses of 35 percent after the company shut down accounts to preserve capital. Advanta will cease lending June 10 after uncollectible debt reached 20 percent as of March 31,... The lender earmarked $1.4 billion to buy back securitized card loans with offers of 65 cents to 75 cents on the dollar.... Advanta decided to cut off customers after “charge-offs” rose to twice that threshold, from 9.6 percent at year-end. “The question is how many business owners depend solely on their Advanta credit card,” said William Dunkelberg, chief economist at the National Federation of Independent Business. While most probably have other sources of credit, self-employed entrepreneurs may have trouble getting a new card, he said. “Credit is harder to find than it’s ever been in this expansion,” said Dunkelberg, whose biography lists him as a former Advanta director... “We’ll be shutting down accounts for future transaction activities, but many of the customers will maintain balances and pay us off over time,” Browne said yesterday in a telephone interview. “We’ll have to service and collect on that, and that will be the first order of business for the company.” More than 90 percent of Advanta’s small business customers will have “adequate” access to alternative credit after the company halts lending, Browne said... “Early amortization has been viewed as a catastrophic event for issuers,” Scott Valentin, an analyst at Friedman Billings Ramsey & Co., said today in a research note. Advanta’s filing said that the charge-off rate for uncollectible loans may increase after accounts are closed. Valentin said that’s likely because “the cards have substantially less utility to cardholders,” cutting the incentive to keep up with payments. “They’re hoping they can stay alive barely until the environment changes,” said David Robertson, president of the Nilson Report, the Carpinteria, California-based industry newsletter. This is “a big sign that the credit-card industry has problems that are going to be around for several years.”