If you want to start your small business don’t rely on credit cards

image A new report released by the Kauffman Foundation revealed that those startups who rely heavily on their credit cards are more likely to fail at their first year of existence. The research shows that every $1,000 of credit card debt increases the probability that a new firm will close by 2.2%. 59% of the businesses in the survey had no employees when they were founded, and only 18% had three or more, so this applies mainly to microbusinesses.

Before the credit crunch when there were numerous ways to obtain a credit to finance your business many firms preferred to use their credit cards. Researcher Robert Scott examined 5,000 firms started in 2004 and tracked their progress through 2006 using data from the Kauffman Firm Survey. About 58% of them used credit cards to fund their business in the first year, and nearly one-third of those carried a revolving balance. The average debt for those companies with outstanding balances at 2004 was $11,000.

Nevertheless, the use of credit card itself does not contribute to the business failure but carrying a balance on a credit card does. Scott found that “credit card debt increases and then eventually stabilizes to a manageable level during many firms’ first few years of operation, while firms with high credit card debt close and successful firms start paying off their debt.”

Thereby, the report notes that “with the recent contraction of credit markets, many new businesses will face difficulties in accessing traditional forms of credit, which likely will create greater demand for credit cards.”

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