Revolving Credit to SMEs: The Role of Business Credit Cards
In cooperation with ECB
Small businesses in the US rely on business credit cards to meet their financing needs. Using a large dataset from a credit reporting agency we document new facts on firms borrowing via business credit cards: average utilization is almost 30%, is significantly higher for smaller and riskier firms, and is correlated with delinquencies. Simultaneously, interest rates on card balances are twice as high as those on loan terms. We develop a structural equilibrium model of firms' demand for credit cards, their utilization, and their default choice, accounting for correlation between ex-post utilization and default, as well as bank competition with non-banks. Our model helps rationalize firms' demand for card borrowing as a hedge against cash flow volatility, and enables us to evaluate whether the high rates charged on cards reflect a high cost on lending due to the correlation of utilization and delinquency of high markups. Our estimation suggests high rates primarily reflect the latter. Inter counterfactual analyses, we explore the provision of business credit cards under stress scenarios featuring concurrent increases in firms credit card utilization and lenders cost. We find that absent large shock to funding costs, lender profits increase as increased revenue through higher utilization more than offsets the accompanying increases in delinquency and lending costs. Finally, we use the model explore the equilibrium impact of proposed bank capital rules that add a portion of undrawn credit card balances to bank risk-weighted assets. Such rules tend do reduce bank credit provision, push lending outside the regulated banking sector, while modestly decreasing firm surplus, especially among the smallest, most card-dependent firms.