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| Utilizing near real-time QuickBooks data from over 1.6 million small businesses and a targeted survey this paper highlights the critical role credit card financing plays for small business activity. We examine a two year period beginning in January of 2021. A turbulent period during which credit card usage by small U.S. businesses nearly doubled interest payments rose by 60% and delinquencies reached 2.8%. We find first monthly credit card payments were up to three times higher than loan payments during this time. Second we use targeted surveys of these small businesses to establish credit cards as a key financing source in response to firm-level shocks such as uncertain cash flows and overdue invoices. Third we establish the importance of credit cards as an important financial transmission mechanism. Following the Federal Reserve’s rate hikes in early 2022 banks cut credit card supply leading to a 15.75% drop in balances and a 10% decline in revenue growth as well as a 1.5% decrease in employment growth among U.S. small businesses. These higher rates also rendered interest payments unsustainable for many contributing to half of the observed increase in delinquencies. Lastly a simple heterogeneous firm model with a cash-in-hand constraint illustrates the significant macroeconomic impact of credit card financing on small business activity. |
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