I’ve used credit cards to finance my business ventures for years. Sometimes I’ve been debt free and paid them all off, some seasons I carried balanced and paid high credit card fees. Overall they were a ‘bridge” to help with cash flow over the years. Small businesses are increasingly turning to credit cards as a critical tool for managing cash flow and handling unexpected expenses. Recent research, using anonymized data from up to 1.6 million Intuit QuickBooks customers, reveals that credit card usage among small U.S. businesses has surged, leading to both opportunities and challenges.
In this post, we explore the growing reliance on credit cards, the financial burdens involved, and how these dynamics impact small business growth.
Related Business Credit vs Personal Credit: Which One is Right for Your Small Business?
A Surge in Credit Card Usage
Between January 2021 and January 2023, credit card usage by small businesses in the United States nearly doubled. During this period, monthly payments made on credit cards were up to three times higher than those made on loans. This marked shift highlights a fundamental change in how entrepreneurs are financing their operations.
This spike in usage is not just a trend—it’s a survival strategy. As small businesses faced uncertain cash flows and overdue invoices, credit cards became a vital financial lifeline. Entrepreneurs found that swiping a credit card was far more convenient than securing a traditional loan, especially when they needed quick access to funds.
Financial Burdens: Rising Interest and Delinquencies
With increased usage, however, comes increased risk. Over the same period, interest payments on credit card balances soared by 60%. For many small businesses, this led to unsustainable financial stress, culminating in a delinquency rate of 2.8%—a worrying sign of financial strain.
Federal Reserve rate hikes in early 2022 exacerbated this burden. As banks responded by cutting the credit supply, small businesses saw a 15.75% drop in credit card balances. The resulting financial pressure led to a 10% decrease in revenue growth and a 1.5% decline in employment growth among affected businesses.
Credit Cards as Financial Buffers
Despite these challenges, credit cards remain indispensable for many entrepreneurs. The data shows that more than 55% of small businesses used business credit cards as their primary financing method in the past year. Credit cards are often preferred because they offer accessibility, flexibility, and the ability to manage sudden cash flow shocks.
Small businesses particularly value credit cards for their ability to cover unexpected expenses without the cumbersome process of applying for a loan. Even with the risk of high interest rates, the immediate availability of funds often outweighs the potential financial drawbacks.
The Double-Edged Sword of Credit Card Financing
Credit cards can be both a lifeline and a liability. While they provide quick financial relief, they also expose businesses to risks of escalating debt and mounting interest payments. This dual nature means that while credit cards are essential for navigating short-term financial gaps, they can also entrench long-term debt issues if not managed carefully.
Related – Best Free Digital Business Cards For Your Business
Why Some Businesses Prefer Credit Cards Despite the Risks
Not all businesses use credit cards out of necessity—some choose them strategically. The appeal lies not only in accessibility but also in the rewards programs and transaction ease. Business owners often find that the benefits, like cash back or travel points, make using credit cards more attractive than traditional financing methods.
However, this preference shifts when financial conditions worsen. Small businesses facing tighter credit conditions or delayed payments from clients are more likely to increase their reliance on credit cards, not out of preference but out of necessity. It’s a balancing act between convenience and the risk of accumulating debt.
A Disproportionate Impact on Small and Young Businesses
The data also shows that credit card dependence is more pronounced among younger and smaller businesses. Startups and self-employed entrepreneurs often allocate a significant portion of their payments to credit card debt, compared to more established companies. This trend indicates that credit cards serve as a crucial financial tool for those with limited access to other forms of credit.
Economic Implications: The Long-Term Cost of Credit Card Debt
The surge in credit card financing has profound economic implications. As interest rates rise, the cost of maintaining credit card balances becomes unsustainable for many small businesses. Those heavily reliant on credit cards are more vulnerable to financial downturns, risking default and long-term instability.
For policymakers and financial institutions, these insights underscore the need to support small businesses with more sustainable financing options. Balancing short-term liquidity needs with long-term financial health will be essential in fostering resilient small business ecosystems.
Final Thoughts
Credit cards are both a vital tool and a potential pitfall for small businesses. While they offer a quick solution for cash flow challenges, they also carry risks that can jeopardize long-term growth. As small businesses continue to navigate an unpredictable economic landscape, understanding the trade-offs of credit card financing will be crucial for making informed financial decisions.
