The Role of Credit Cards in Providing Financing for Small Businesses

When Mark Fasciano and Ari Kahn started their software company, FatWire, in 1996, each of them contributed $20,000 from their credit cards to pay for the equipment and services that the company needed. In 2001, the company was named to Deloitte and Touche’s Fast 50 list of rapidly growing technology firms in New York. Today the company generates $10 million in annual sales, and its newest clients include Crown Media, Hallmark Channel, Bank of America, Andersen Windows and Aventis Behring. Business successes like these have helped the U.S. economy grow. Small businesses provide most workers with their first jobs and initial on-the-job training in basic skills and employ more than half of the private work force.

Stories like FatWire’s abound. Financing a business is difficult, and entrepreneurs tend to resort to credit cards for financing when other loan sources are scarce. Personal credit cards provide an increasingly large pool of capital for small business startups. Credit cards did not even exist in their current form before 1966. They have grown explosively since the end of the 1981-1983 recession. According to data from the Survey of Consumer Finances (SCF), which is discussed in more detail below, the amount of credit card financing available to the American public was $1.5 trillion in 2001. That pool of credit was just as available to people to start their own businesses as it was to buy stereo equipment. Indeed, $298 billion of credit card financing was available to households headed by someone who had their own business in 2001. And, of course, credit cards have continued to grow since 2001 so that the amount of credit card financing available to consumers in general and small business owners in particular is even larger today.

Of course, stories of credit cards helping people to start successful businesses do not show that credit cards are an important source of financing any more than stories of successful businesses started in garages show that having a garage is key to business prosperity. This paper examines the role of credit cards in financing small businesses using two sources of data. The SCF provides general information on the use of credit cards by small business owners from 1970-2001. The 1998 Survey of Small Business Finance (SSBF) provides detailed information on the use of credit cards by small businesses in that year. Together, these data sources provide a broad and deep understanding of how small businesses use credit cards.

See the full report here:

The Role of Credit Cards in Providing Financing for Small Businesses                    


 

David G. Blanchflower — Dartmouth College – Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA); Bank of England

David S. Evans — Full bio here

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