Opinion: When credit shrinks, small businesses pay the price

When I meet with small business owners across California, the conversation almost always comes back to one thing: access to credit. Whether it’s keeping payroll on track during a slow month, stocking inventory ahead of a busy season or responding to an unexpected expense, access to credit often determines whether a business grows, survives or shuts its doors. This is especially true for California’s Latino entrepreneurs, who are starting businesses at faster rates than the general population and are an increasingly vital part of the state’s economy.

That reliance on credit reflects how far we’ve come. For decades, access to capital was limited to those with wealth, collateral and long-standing relationships. Many small businesses were excluded from traditional financing altogether. Without assets or connections, promising business ideas often stalled before they started.

Over time, that landscape has changed. The expansion of credit markets, risk-based lending with interest rates set higher to account for borrower risk, stronger disclosure requirements and increased competition among lenders has broadened access to capital. While gaps remain, today’s entrepreneurs are far more likely to have an entry point into the financial system, often through credit cards or other flexible credit products, than they were 30 years ago. This progress has helped thousands of small businesses start, stabilize and grow.

These realities matter because some policy proposals threaten to make credit harder to obtain. Proposals to cap credit card interest rates at low levels, such as a 10% annual rate, are gaining traction because they sound like common-sense consumer protection. But interest rate caps do not expand access, they restrict it.

When access to credit shrinks, the consequences extend beyond individual businesses. Owners facing tighter credit are often forced to delay hiring, cut employee hours, postpone investments or close altogether. Those decisions ripple outward, reducing local employment, shrinking tax revenues, and weakening neighborhood commercial corridors. In California’s Latinocommunities, where small businesses often serve as economic anchors and sources of upward mobility, those ripple effects can be especially damaging.

Rate caps make lenders less willing to serve higher-risk borrowers. When lenders cannot price for risk, they respond by tightening standards, lowering credit limits or exiting certain markets altogether. Entrepreneurs with limited credit histories are often the first to lose access. Economic research consistently shows that strict rate caps reduce credit availability for the very groups that rely on it most. That includes Latino entrepreneurs who may have strong cash flow and viable businesses but lack long credit histories or traditional collateral.

California is home to more than four million small businesses with 29% being minority owned, employing seven million people and representing 99.9 percent of all businesses in the state. National surveys show nearly 60 percent of small business owners sought external financing in the past year, with most applications used to cover operating costs rather than expansion. 

Credit cards have become essential tools for many entrepreneurs, offering speed, flexibility and a foothold in the broader credit system. Rather than pursue blunt rate caps, policymakers should focus on expanding responsible credit access, improving transparency and strengthening small business lending ecosystems. California’s entrepreneurs are ready to invest, hire and innovate. What they need are policies that reflect the real economics of small business credit. Policies that recognize that access, not restriction, is what allows diverse entrepreneurs to build resilient businesses and contribute fully to the state’s growth.

Access to credit isn’t just about finance. It’s about fairness, opportunity and the future of our communities. We’ve made real progress in opening the doors of the credit system. The challenge now is to keep those doors open and not quietly close them again.