Credit card debt hurts start-ups’ chances of survival

A new study by the Ewing Marion Kauffman Foundation says credit card debt lessens the likelihood of a new business surviving its first three years.

The study indicates that in many companies’ first few years, their credit card debt increases and then stabilizes. The businesses with high credit card debt close, while successful businesses start paying off their debt.

“Small businesses’ access to formal credit markets historically has been limited, a situation that has been exacerbated with the recent contraction of credit markets,” said Robert E. Litan, vice president of research and policy at Kauffman. “Consequently, entrepreneurs use credit card debt to finance their new ventures. Credit cards, however, are an expensive way to fund a business, and this new study suggests that escalating credit card debt negatively affects a new company’s chance of survival.”

More than half of new firms rely on debt. Credit cards tend to appeal to small businesses because they’re easier to get than traditional bank loans, and they help manage finances and streamline payments.

Kauffman tracked businesses founded in 2004. Robert H. Scott III, assistant professor of economics and finance at Monmouth University in West Long Branch, N.J., conducted the research.

(c) 2009, The Dallas Morning News. Source: McClatchy-Tribune Information Services.