Revolving Credit to SMEs: The Role of Business Credit Cards

Small businesses in the US are frequently excluded from borrowing through traditional term loans or lines of credit and rely instead on highly standardized, high-interest rate business credit cards to meet their financing needs. Are rates high because this credit is costly to provide or because lenders charge high markups? We document that average credit card utilization is almost 30% and is higher for firms facing significant cashflow volatility. While the unconditional delinquency rate is low, it is strongly correlated with utilization, potentially making cards expensive to provide because borrowers make interest-generating draws when they are least able to repay. We develop and estimate a structural model of firms’ card demand, utilization, and default choice, accounting for imperfect competition and the correlation between utilization and default. We find that while the correlation between utilization and delinquency leads to modestly higher rates, they are primarily explained by markups rather than lender costs, making business card provision highly profitable. In counterfactual analyses we show that under systematic stress scenarios, absent large shocks to lender funding costs, lender profits tend to rise in times of borrower stress, as higher revenue from utilization more than offsets increases in delinquency. Finally, we evaluate proposed capital regulations that add a portion of undrawn credit limits to bank risk-weighted assets. Such rules reduce bank credit provision and push some lending outside the regulated banking sector, while modestly reducing firm surplus. Because credit card lending tends to be more profitable in times of stress, such regulations may be counterproductive for bank stability.