Posted by Molly Nelson - According to a
study recently released by the Kauffman Foundation, the more credit card debt a new business has, the less likely it is to survive its first three years of operation.
The study found that more than half of all new firms rely on debt financing at the start of operations, and credit card debt is the method of choice for the majority of businesses. Credit cards can be appealing to small businesses because they can help manage finances, are easier to procure than traditional bank loans or government grants, and credit card companies won't ask how their money has been used.
Results showed that for every $1,000 increase in credit card debit, the probability that a firm will close increases by 2.2 percent. For many firms, credit card debt increases and then gradually stabilizes to manageable levels over the first few years of operation, with successful firms starting to pay off debt after a few years and firms with high credit card debt closing.
Read the full study "The Use of Credit Card Debt by New Firms" from the Kauffman Foundation here.
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[Hat tip: Fresh Inc., GigaOM]