A new study reveals that small businesses are increasingly relying on credit cards to fund their operations due to high inflation and rising borrowing costs.
Small businesses are facing significant challenges as they navigate the impact of inflation and increasing borrowing costs. According to a Small Business Index published by Intuit, a notable number of small businesses have turned to credit cards as a primary or secondary source of funding in the past year. In the United States, 30% of small businesses have relied on credit cards, while 22% have sought loans or lines of credit to cover their expenses. This surge in credit card usage among small business owners has been driven by the rise in inflation since 2021. As a result, monthly credit card spending by small businesses has increased by an average of 20%, amounting to approximately $3,000 per business.
Impact of Inflation and Interest Rates on Small Businesses
The current economic landscape, characterized by inflation and rising interest rates, presents unique challenges for small businesses. The Federal Reserve’s aggressive approach to combat inflation has resulted in 11 rate increases over the past year, pushing interest rates from near zero to 5.25% to 5.5%. These higher interest rates have led to increased borrowing costs for both consumers and businesses, forcing employers to cut back on spending and slowing the overall economy. Small businesses, in particular, are feeling the strain as they heavily rely on credit availability to sustain their operations.
Limited Access to Loans and Higher Interest Rates
A recent survey conducted by the National Federation of Independent Businesses revealed that a net 4% of small business owners reported facing greater difficulties in obtaining loans compared to the previous three months. Additionally, 24% reported paying higher interest rates on their most recent loans. The tightening of monetary policies has resulted in both scarcer and costlier loan options for small businesses, making it increasingly challenging for them to secure the necessary funding.
Rising Costs as the Biggest Challenge
In addition to borrowing costs, small businesses are grappling with the impact of ongoing inflation. The Intuit study found that 45% of small businesses identified rising costs as their biggest challenge, while 13% cited low-price competitors and 12% mentioned low demand. Another 12% highlighted the cost and availability of financing as their primary risk. The combination of higher borrowing costs and increased expenses due to inflation has put small businesses in a precarious position.
Small Businesses and Credit Card Dependence
The Intuit study reveals that credit card usage among small businesses has surged as a result of inflation and rising borrowing costs. With limited access to loans and higher interest rates, small businesses have turned to credit cards as a viable funding option. Credit cards offer a more accessible and flexible solution for short-term financing needs. However, this increased reliance on credit cards comes with its own set of risks, such as accumulating high-interest debt and potential cash flow challenges.
The Future of Small Business Funding
As small businesses continue to face the challenges posed by inflation and rising borrowing costs, it is crucial to explore alternative funding options. Seeking out financial institutions that offer competitive loan rates and exploring government-backed loan programs can provide small businesses with more affordable financing options. Additionally, implementing strategies to manage and mitigate the impact of rising costs, such as adjusting pricing structures and optimizing operational efficiency, can help small businesses navigate these challenging times.
The combination of inflation and rising borrowing costs has forced small businesses to turn to credit cards as a primary or secondary source of funding. With limited access to loans and higher interest rates, credit cards offer a more accessible solution for short-term financing needs. However, this increased reliance on credit cards comes with its own set of risks. Small businesses must explore alternative funding options and implement strategies to manage rising costs in order to sustain their operations in the face of these challenges.