According to a recent study that was conducted by the Ewing Marion Kauffman Foundation, there is a possible correlation between credit card debt and reduced viability in small business ventures. In fact, the study suggests that chances of such businesses surviving its first three years are noticeably lowered by credit card debt.
In the study, there are indications that many companies have a rough few years at the beginning where credit card debt may increase but then later stabilize. Those businesses that maintain high credit card debt eventually close, while those that become successful immediately begin paying down their debt.
Robert E. Litan, vice president of research and policy at Kauffman made the following comment. “Small businesses’ access to formal credit markets historically has been limited, a situation that has been exacerbated with the recent contraction of credit markets.”
He added, “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.”
The study serves to highlight some interesting business trends as well.
According to some statistics, more than half of new businesses rely on debt. As such, credit cards remain the top source of funds since largely because they are more accessible to smaller businesses than traditional bank loans. Additionally, credit cards can be used to manage finances and make payments fast and simple.
Yet, with this appeal, comes some hard lessons for some would-be entrepreneurs. While credit cards can be an effective tool, there are definitely dangers for many new businesses. Some do not heed the warnings or they miscalculate the inherent risks of their venture and pay for it in heavy credit card debt. Despite the economic climate, there aren’t any signs of such use of credit cards slowing.
Tags: credit card debt, business survival
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