Small businesses are driving credit card debt higher

Small businesses are increasingly turning to credit cards as a key source of funding as they continue to grapple with still-high inflation and rising borrowing costs. 

A new Small Business Index published by Intuit shows that, unlike large firms, a “significant number” of small businesses have relied on credit cards over the past 12 months. In the U.S., 30% of small businesses have used credit cards as the primary or secondary source of funding. Another 22% relied on a loan or line of credit to cover their expenses. 

Credit card usage among small business owners spiked in 2021 – when inflation began to rise – and has been steadily increasing since then. In total, monthly credit card spending by small businesses is 20% higher on average than it was before the COVID-19 pandemic. That amounts to about $3,000 per business.

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“Inflation and interest rates are creating unique challenges for small businesses,” the study said. “Small businesses are feeling the strain and increasingly relying on credit cards.”

The Federal Reserve has raised interest rates sharply over the past year, approving 11 rate increases in the hopes of crushing inflation and cooling the economy. In the span of just 16 months, interest rates surged from near zero to 5.25% to 5.5%, the fastest pace of tightening since the 1980s.

Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. The Intuit report suggests that higher interest rates are disproportionately affecting small businesses, because those firms in particular rely on credit availability in order to function.

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A net 4% of small business owners reported their last loan was harder to get than compared with the previous three months, according to a recent survey published by the National Federation of Independent Businesses, a Tennessee-based association of small business owners. 

Another 24% reported paying a higher rate on their most recent loan.

“Small businesses are feeling the challenges of tighter monetary policies, particularly when it comes to securing loans, which have become both scarcer and more costly,” the Intuit study said. 

On top of steep borrowing costs, small businesses are also grappling with pain from the ongoing inflation crisis. Nearly half of small businesses (45%) identified rising costs as the biggest challenge facing them today, compared with 13% who said low-price competitors and 12% who said low demand. Another 12% warned that the cost and availability of financing is the biggest risk.

Although inflation has cooled considerably in recent months, it remains up 3.7% compared with the same time one year ago, according to the most recent Labor Department data.