How Small Businesses Can Use Credit Wisely in a Tough Economy

Small businesses are no strangers to economic turbulence. Labor shortages and rising costs have made it even harder to plan ahead. At the same time, interest rates and stricter lending criteria have significantly increased the cost of borrowing, which is often a lifeline for small businesses to grow — and even survive. These pressures are squeezing cash flow and forcing businesses to make hard choices about managing expenses and keeping operations running.

Credit cards have become a financial lifeline for many businesses to stay afloat. They offer fast access to funds when needed most, especially for businesses with less cash in the bank. While credit cards can certainly help fill short-term gaps, relying too heavily on them without a long-term financial strategy may create even more uncertainty over time for businesses of all sizes.

Understand Credit Cards’ Leverage and Liabilities

When access to credit diminishes, so can businesses’ ability to grow. Why? Interest rate hikes make borrowing more expensive and harder to secure. According to “Credit Card Entrepreneurs,” a new study by economists using anonymized data from Intuit QuickBooks, rate hikes that caused banks to pull back on financing resulted in an almost 16% decrease in credit card balances for small businesses, highlighting just how closely access to credit is tied to growth.

But the flexibility of credit comes at a cost. The study also found that over a two-year period beginning in January 2021, businesses saw a 60% increase in interest charges, which contributed to an increase in delinquencies, a sign of how quickly costs can spiral without a clear repayment strategy.

Know When to Use Credit and How Much to Carry

During the studied period, businesses were putting three times more toward credit card payments than term loans, proving how credit cards have become an essential part of cash flow management for many. But when faced with financial shocks or broader economic uncertainty, many businesses reduce their credit card payments by an average of 3.2%. However, they didn’t adjust their savings or loan behaviors. Those habits compound risk over time, leading to higher interest charges and a greater chance of missed payments.

Setting a few guardrails can go a long way in keeping credit use intentional and low risk. For example, avoid tapping credit for fixed monthly expenses such as rent or payroll, which should be covered by more predictable cash flow. Longer-term financing is also better suited for larger investments such as hiring, equipment purchases or expansion plans.

Credit cards can best be used for variable, short-term needs. These could include purchasing inventory ahead of a busy season, covering emergency repairs or bridging short gaps in cash flow. One way to stay on top of repayment is to set a simple rule: For example, you could keep card balances under a certain percentage of your projected monthly income.

It’s also important to look beyond monthly minimum payments and understand the true cost of borrowing. Pay attention to payment terms and interest rates, such as when a 0% APR offer expires or whether early repayment is penalized. Many experts recommend keeping your credit utilization below 30% to protect your credit score. Credit can be helpful and shouldn’t be ruled out for businesses as long as they have a clear plan to repay it.

Improve Invoice Workflows so You Don’t Need to Rely on Credit

The study also found that businesses with more overdue invoices were significantly more likely to report greater reliance on credit cards for financing than those with fewer. Credit often becomes the fallback when payments are delayed, filling the gap but potentially adding new costs.

Improving invoice workflows can reduce that reliance. There are a few practical ways to tighten up the process. Setting clear, realistic payment terms upfront can help establish expectations on both sides. Additionally, if your client is paying you regularly, setting up automated, recurring payments can ensure you get paid on time. Internally, setting a clear process for handling late payments — such as adding fees for consistently missed payments — can reduce delays and confusion. Investing in payment processing that automates reminders and tracks payment status in one place can help keep things on track.

Build a Clearer Picture Before You Borrow

New businesses often have less access to capital and fewer cash reserves, which can expose them to financial instability. Consider opening a line of credit before it’s urgently needed. Lenders are more likely to approve applications when finances are healthy, not under pressure. Setting it up early increases the chances that funding will be available when needed.

Forecasting can give these businesses a way to plan ahead and stay prepared. It offers a clearer view into when income is expected, how long reserves might last and when short-term funding might be needed. With the right tools, they can model different income scenarios and understand when cash flow might dip. It also clarifies how much runway is available and what repayment could look like. With that visibility, borrowing becomes a strategic decision, not a last resort, and growth stays within reach even when conditions shift.

Credit has been a valuable tool for many businesses, helping them weather tough times and even grow. But it’s important to remember that credit alone isn’t a growth strategy. For lasting success, credit cards should be used intentionally, with a strategy behind them.

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This article was written by Juliana Berger from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.