Credit cards are one of the most debated sources of small business financing in the United States economy. They have been instrumental in the early stages of some notable entrepreneurial successes, such as Airbnb’s “Visa financing round” and Netflix, whose founder Reed Hastings used credit cards to cover initial expenses and test mailings for the DVD rental service. At the same time, their high interest rates can just as easily lead to the downfall of many small businesses, turning a potential lifeline into a financial burden.
Despite the critical role of credit card financing in sustaining small businesses, its importance and impact on their economic health remain largely unexplored due to a previous lack of comprehensive data. In this paper, the authors address this gap by utilizing high-quality and near-real-time data from nearly 1.6 million small businesses using the Intuit QuickBooks online platform, complemented by large-scale surveys of these businesses. They document the following key facts and consequences of credit card financing for small businesses:
- Small firms rely heavily on credit card financing. Between 2021 and 2023, monthly credit card repayments were up to three times higher than traditional loan repayments. Credit card interest burden rose by 60% during the post-COVID monetary policy tightening that began in March 2022, leading to elevated levels of credit card delinquencies.
- Similarly, survey responses reveal that over 55% of businesses report using business credit cards for financing in the past 12 months, far exceeding reliance on alternatives such as credit lines, loans, or internal funding. Entrepreneurs particularly value credit card financing for its accessibility and flexibility in managing cash flow shocks. Younger firms, smaller firms, and those with lower cash reserves consistently allocate a larger share of their payments to credit card financing.
- Surveys also reveal that credit cards are a key financing source in response to firm-level shocks, such as uncertain cash flows and overdue invoices.
- Changes in the supply of credit card financing have real effects on firms. When banks that issue credit cards are more financially vulnerable to interest rate hikes, as measured by a one standard deviation lower income gap: measure of a bank’s exposure to interest rate risk, defined by the difference between the share of assets and liabilities that reprice within a given time horizon , they pass on this risk to small businesses. Following the Federal Reserve’s rapid tightening of monetary policy in early 2022, firms borrowing from these more exposed banks saw credit card supply contract, leading to a 15.75% decline in balances, a 10% drop in revenue growth, and a 1.5% decline in employment growth. Higher interest costs also rendered credit card debt unsustainable for many, contributing to roughly half of the observed rise in delinquencies.
- Finally, the authors develop a model of small business behavior to assess how credit card financing affects the transmission of interest rate and loan supply shocks. They find that while credit cards can serve as a short-term buffer by expanding borrowing capacity when other financing is constrained, their high interest costs can strain cash flows over time and slow recovery.
The findings underscore that credit cards are not just a convenience but a critical source of financing for small businesses, especially when other forms of credit dry up. However, this reliance carries real macroeconomic consequences. When monetary policy tightens, and banks vulnerable to interest rate risk pull back, small businesses disproportionately bear the cost through lost revenue, slower hiring, and heightened financial distress. As credit card use continues to rise among small firms, policymakers and lenders should recognize the dual role these products play, as both a flexible lifeline and a transmission channel for systemic shocks.