Beyond the Classroom: Learning from research on SME credit card usage
For many small business owners, the American Dream is fueled by a piece of plastic. In an economy where customers often pay late but rent and payroll are due on time, small and medium enterprises (SMEs) frequently live with uneven cash flows. To bridge these gaps, many rely on business credit cards as a flexible form of short-term borrowing. However, recent analysis suggests that current efforts to mitigate lender risk may unintentionally push these very businesses out of the traditional financial system.
I joined Haas’s Institute for Business & Social Impact (IBSI) because I am interested in how policy and finance intersect to support or hinder social mobility. I wanted to explore the research led by Haas faculty to understand how business credit cards serve as a backbone for SMEs and what happens when the regulatory “safety cushions” we build for banks start to squeeze out the smallest shops. This interest is personal for me as both of my parents are small business owners. I grew up seeing firsthand the stress of balancing the books when a client payment is delayed, and I know that for families like mine, access to a fair line of credit isn’t just a financial “product”, it’s the difference between sleeping at night or worrying about the next month’s lease.
I decided to explore a study led by UC Berkeley Haas faculty Matteo Benetton and Greg Buchak (Stanford). Their work, “Revolving Credit to SMEs: The Role of Business Credit Cards,” provides a critical look at a market that is often overlooked by official government numbers.
This interest is personal for me as both of my parents are small business owners. I grew up seeing firsthand the stress of balancing the books when a client payment is delayed, and I know that for families like mine, access to a fair line of credit isn’t just a financial “product”, it’s the difference between sleeping at night or worrying about the next month’s lease.
Interview with Professor Benetton
After working with the IBSI team to develop a research brief (see here!) for this study, I led a deep-dive interview with Professor Benetton to dig into the research details. Growing up in a family of entrepreneurs, I wanted to understand how this data could actually shape and inform policy to protect businesses and business owners like my parents. Here is what I learned:
Power of “Hidden” Data in Shaping Policy
Traditional government numbers often miss the granular health of the small business economy. Professor Benetton’s research utilized a proprietary panel from a U.S. commercial credit bureau, allowing the research team to see the “invisible” struggles of firms with fewer than five employees. Professor Benetton emphasized that we cannot design effective policies if we don’t understand the behaviors and risks for certain sub-populations, such as these smallest firms. For example:
- Markups vs. Risk: The research found that business credit card rates (around 13%) are twice those of term loans. Much of this gap is due to lender markups, not just the risk of the business failing. Translation: a focus on profit that goes above and beyond risk mitigation.
- Behavioral Realities: Many SMEs are “interest-rate insensitive” because they prioritize the convenience of the card or underestimate future borrowing needs and the additional costs associated with the convenience of credit card access. If policy ignores this reality, it risks taxing the very people who have the least flexibility to switch products.
Professor Benetton’s research utilized a proprietary panel from a U.S. commercial credit bureau, allowing the research team to see the “invisible” struggles of firms with fewer than five employees.
Keeping Systems Safe without Crushing Shops
I asked Professor Benetton for his personal opinion on a hypothetical question: If you were advising the government today, what policy would keep the system safe without crushing the “mom-and-pop” engine of our economy? The research suggests we need to move beyond “one-size-fits-all” rules like Basel III Endgame, which could force banks to raise card APRs by about 3% and hit the smallest firms the hardest. Instead, he recommends:
- Policymakers and regulators use data and simulations to model diverse impacts before scale: Regulators should work with researchers to build structural models to simulate how new rules hit different firm sizes and risk categories before they are implemented. Research like Professor Benetton’s does exactly this – and we hope it is reaching the right decision-makers.
- Financial service providers – traditional and non-traditional – should consider a “Credit Card-Like” Product: The Small Business Administration (SBA) currently offers loans but as Professor Benetton’s research showed many businesses value the flexibility of a card. Thus there should be a shift to designing products that function like credit cards but include caps on interest rates.
- Public services – such as the SBA – may modernize their offerings (e.g 7a program): Public entities must rethink the delivery mechanism of their core products. They must shift away from rigid “one time” loan disbursements to integrated digital credit lines. Current data indicates that mid-risk firms are frequently priced out pushing them into high interest private credit. Therefore a more flexible government product is essential to bridge this gap and provide a vital safety net for underserved mid-risk businesses.
My Takeaways: Finance for Real Lives
These lessons hit home. As someone planning a career in credit underwriting, and as the daughter of entrepreneurs, I believe the future of lending requires a balance between rigor and inclusion. I grew up watching my parents navigate these exact hurdles, and this research proves that the “invisible” struggle of the small business owner is a data-driven reality.
I’m excited to explore more innovative underwriting measures that Professor Benetton highlighted, specifically cash-flow based underwriting. This approach moves away from simply checking off physical assets or collateral and instead looks at the actual health of a business’s daily operations. By using transaction-level data, lenders can offer products that provide needed flexibility without the excessive markups that currently act as a “tax” on small firms.
What stayed with me most is that finance is at its best when it’s designing systems around real lives, not just risk spreadsheets. High interest rates shouldn’t just be a “markup”; they should reflect a fair assessment of risk that allows small and medium businesses to thrive rather than just survive.
As I move forward, I want to push for practices where risk management and community empowerment are mutually reinforcing. If we can design a banking system that is safe but doesn’t crush “mom-and-pop” shops like my parents’, we can ensure that financial innovation truly changes generational trajectories.
I’m excited to explore more innovative underwriting measures that Professor Benetton highlighted, specifically cash-flow based underwriting. This approach moves away from simply checking off physical assets or collateral and instead looks at the actual health of a business’s daily operations.
