Advanta files for bankruptcy -- more bad news for small-business borrowers

A deep recession isn't a great time to be in the business of lending to entrepreneurs. First CIT Group had to seek bankruptcy protection last month when it failed to strike a deal with bondholders to rework its debt. And now Advanta (ADVNB), a credit-card company specializing in lending to small-business owners, will follow, it announced today.

The news comes five months after Advanta cut off borrowing by its cardholders, citing a surge in delinquencies. It's still hoping to collect $2.7 billion in balances from 360,000 customers.

"The economic debacle over the last two years devastated Advanta's small-business customers and Advanta itself," said Advanta CEO Dennis Alter in a statement.

With small-business bankruptcies up 44 percent in the third quarter compared with a year earlier, according to Equifax, it's no surprise that the companies that help finance their operations are getting hit hard.

Many banks are pushing entrepreneurs who want to borrow into credit cards and away from traditional loans. The federal Small Business Administration found that small-business bank loans of up to $1 million grew just 4% last year, compared with a 6.8% expansion in loans up to $100,000, thanks largely to "continued efforts to promote small-business credit cards by credit card issuers."

In that light, Advanta's plight has been particularly painful.

Advanta's bankruptcy filing says it has $363 million in assets and $331 million in liabilities, and covers 14 of its business units. Not included is the company's bank, issuer of its small-business credit cards, which won't be affected by the filing.

That doesn't mean the bank is out of danger. Advanta warned that the institution's capital has fallen below the level required by its regulators and could be seized and placed into receivership with the Federal Deposit Insurance Corp., after which it would likely be taken over by a healthier rival.

Advanta isn't bolstering the bank's reserves to "preserve value" for bondholders during its bankruptcy reorganization, it said in the statement.

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