Cash or credit: Small business use of credit cards for cash flow management
The 32 million small businesses in the United States are a heterogeneous group that operate across many industries, contributing over 43 percent of the nation’s gross domestic product.1 One thing that they have in common is the need to manage their cash flows, which are often irregular (Farrell, Wheat and Mac 2018, 2020c). As demonstrated during the pandemic, cash liquidity can be essential in times of distress.
One way that small businesses can manage irregular cash flows is to keep cash reserves. Prior Institute research documented that the typical small business kept enough cash to maintain its usual outflows for 15 days in the event of a total disruption to its inflows (JPMorgan Chase Institute 2020).
Most small businesses have credit as another source of liquidity, often with credit cards playing a role. In 2019, there was $368 billion in small business commercial and industrial loans outstanding, and over 46 percent of this amount was for loans less than $100,000.2 The majority of loans in this size category were small business credit cards (U.S. Small Business Administration 2020). Many small businesses have credit cards: 79 percent of small employers had credit cards that were used for business purposes (NFIB 2012).
Credit cards may be personal or business cards, which are relatively new. Business credit cards have been offered since the 1980s, and card issuers began more active pursuit of this segment during the 1990s (Blanchflower and Evans 2004).3 Small businesses use both personal and business cards: 49 percent of small employers used personal cards for business purposes, with the smallest firms (less than 10 employees) more likely by 14 percentage points to use personal cards than those with at least 50 employees (NFIB 2012). The 2003 Survey of Small Business Finances reported 48 percent of small businesses use personal cards and 47 percent use business cards (Board of Governors of the Federal Reserve System 2010). Smaller firms were more likely to use personal cards (Blanchflower and Evans 2004).
Despite policy interest in small business credit more generally, there have been few studies of small business use of credit cards, a common and widely available financing instrument. Most studies relied on survey data (Blanchflower and Evans 2004; Board of Governors of the Federal Reserve System 2010; NFIB 2012), and the Survey of Small Business Finances was discontinued after 2003. More recent studies utilizing administrative data such as the Consumer Financial Protection Bureau’s (CFPB) Credit Card Database focused on consumer cards and cannot link card activity to other financial variables (CFPB 2019).
Policymakers and other decision makers considering the credit needs of small businesses may be interested in how firms use the financing instruments they already have. Our research used more than a decade of longitudinal data linking small business cash flows and their credit card activity. We provide insights on the trajectory of business card usage during a period—2010 through 2022—when business cards were available and more widely used.
In this report, we focused on small business credit cards and their use either as financing instruments (revolving) or as means of payment (transacting). While firms may use personal as well as business credit cards, the scope of this report was limited to business credit cards. We used de-identified administrative data from deposit and credit card accounts to analyze how small businesses use their credit cards for financing considering their cash flow circumstances. In particular, we found:
- Finding 1: The share of firms revolving a credit card balance declined as cash balances increased after the onset of the pandemic.
- Finding 2: Most firms are either consistent transactors or revolvers.
- Finding 3: Small businesses with more cash liquidity are less likely to revolve credit card balances.
- Finding 4: While many revolvers appear to have enough cash to pay their credit card bills in full, some may be maintaining a cash buffer instead.
Data asset and methodology
Our research sample was designed to analyze the interaction between small business finances and the use of credit cards as financing instruments. To our knowledge, this is the only dataset that links granular, longitudinal data on business credit cards and deposit accounts.
As in much of our small business research, the de-identified firms in our sample all have Chase Business Banking deposit accounts that meet our criteria for being active and small.4 We further restricted our sample to small businesses with one Chase business credit card linked through the owner(s) of the deposit accounts. This restriction makes the link between the small business finances and the credit card clearer, but it may not capture the complexity of how small businesses use credit cards to manage their finances.
Our unique data linking firm finances and credit card activity provides valuable insight into small business financing decisions that would otherwise not be possible. However, our research sample covers a segment that may not be representative of all small businesses, even those with credit cards.
Our focus on business credit cards suggests that firms in our sample are typically larger in comparison to those that use personal cards, but they are not so large that they have multiple Chase business cards even though they may have other cards. The appendix provides more detail on the sample and discusses this restriction and its implications. For the sample defined above, we created a longitudinal dataset based on the billing cycle of each credit card. See Box 1 for details on how we used billing cycles and transactions to construct revolving balances.
Box 1: Credit card billing cycles and revolving balances
Credit cards can be used as a debt financing instrument, but they need not be used as such. At the end of the billing cycle, the account holder could either pay the amount of the bill in full or pay at least the minimum amount required by the due date. The former are transactors who may use credit cards for convenience or the opportunity to earn rewards. The latter are revolvers who carry a balance on their credit cards and pay those balances over time. If the account has a grace period, card holders typically do not incur interest charges on purchases if they pay their bills in full during the grace period, which often extends for at least 21 days after the end of the billing cycle.5 Revolving balances are typically subject to interest charges, but promotional rates or periods may apply. However, cash advances commonly incur interest charges immediately.6
In our data, we cannot observe the minimum payment amounts, due dates, or whether a grace period applies. To estimate whether a firm revolves, we compared the total sum of credits to the account after the end of the cycle and before the next cycle ends to the amount due. For example, consider a hypothetical card with a billing cycle ending on the 15th of each month, as shown in Figure 1. If this card had an end-of-cycle balance of $100 on June 15, we took the sum of payments made between June 16 and July 15, the end of the following billing cycle. If that sum was less than $100, then that card revolved a balance by this measure. This method may underestimate the share of accounts that revolve if payments were made after the due date and before the next bill date.
Figure 1: Revolving balance is calculated as the end-of-cycle credit card balance less payments made before the next billing cycle ends
In this example, an $80 payment was made between June 16 and July 15, resulting in a $20 revolving balance. Note that this revolving balance may not correspond to the outstanding balance at any given time; there may have been additional purchases after the statement closed on June 15 and before the $80 payment was made.
If the sum of payments had been at least $100, this card holder would have been a transactor with respect to the June billing cycle. For cards with grace periods, transactors could utilize several weeks of financing without interest charges and smooth their cash flows within this period (Herbst-Murphy 2012).
Reprinted from JP Morgan，the copyright all reserved by the original author.
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