A credit card company that is no longer actively lending to a business is now using a new technique to find new customers.
The tactic, which could save up to $300 on a business loan, has been a major hit for businesses looking to refinance their debts.
It’s been used by more than a dozen card companies in the past two years, but the company that started it, Discover, says that the practice has become popular in recent months.
“The new card issuers are using this tactic to get the right business loans,” says Richard Ritchie, a spokesperson for Discover.
“They’re doing this because it allows them to quickly find a business to refugee from and they don’t have to pay interest on the money.”
A lot of credit cards have started using this new strategy, says Brian McKeown, chief executive of The New York Times Money Group.
It seems to work.
The card companies that are still using the strategy are offering a number of advantages over other card issuances.
It takes time to process, which means they can keep their margins up.
And, they can make more money on a smaller loan than they would if they used traditional originations.
A few companies have already moved into the new strategy.
Bank of America, for example, is using it to refloat a few thousand business loans.
“It is now being used in some of the larger US banks to reflow loan amounts from the old bank originations, and this is a major step in their strategy,” says Michael Meeks, the company’s director of customer service.
A recent study from Credit Suisse found that, after accounting for the costs of handling the original loan, a small business can get a loan of between $30,000 and $100,000 through the new card, compared with the cost of a traditional loan.
In a recent report, the bank also said that many card issuees had been using the tactic for about a year.
This year, Discover has been using it at least three times more than other card companies, McKeon says.
The new tactic is different than traditional origination, because it requires the lender to pay a fee for the loan.
“If you’re paying $10,000 for a $100 loan, you’re essentially taking out $20,000 of your own money, and the fee is not paid, so you end up paying $20,” McKeondy says.
This new approach is still a risky move.
Some lenders have been slow to embrace the card, and some have been reluctant to lend to companies that have already refuged.
“Many of these companies are getting some bad press because of it,” says Ritchie.
But he says that Discover has made great progress since it started using the new technique, which was pioneered by a competitor, American Express.
The company has been able to refocus its efforts on business loans and has been more responsive to customer complaints about problems with its refinance process.
“A lot of our refinance clients have been really happy with our refugment process,” Mckeendys says.
Discover’s refugee business, however, is still struggling.
The New England Business Bank is in the midst of a major expansion, and is looking to make about $300 million in its first year of operations.
The bank says it has seen “a lot of interest from our customers” who want to reflate their existing loans.
That could be a sign that the strategy may not work for everyone.
But for some business owners, it’s a smart move.
They might want to reconsider refloating a business, especially if it’s not their main source of income.