Not in the Cards

By PlanetLaundry staff | Aug 20, 2009

A new study, “The Use of Credit Card Debt by New Firms,” by the Ewing Marion Kauffman Foundation found that credit card debt increases the likelihood that a new business will fail during its first three years of operation.

The study – conducted by Robert H. Scott III, assistant professor of economics and finance at Monmouth University – was based on data from the Kauffman Firm Survey, a panel study of new businesses founded in 2004 and tracked over their early years of operation. Almost 60 percent of the firms in the KFS panel relied on credit cards to finance operations during their first year of business.

The Kauffman study found that every $1,000 in credit card debt increases the probability that a new firm will close by 2.2 percent.

Of course, as Robert E. Litan, vice president of research and policy at the Kauffman Foundation noted: “Numerous factors affect whether or not a new company survives. Credit card debt alone doesn't determine how stable a business will be, but it does appear to be a significant influencer in the company's probability of survival.”

While credit cards have become an indispensable source of credit for many of America’s entrepreneurs, the study demonstrates that often this capital comes at too steep of a price – and perhaps highlights the need for Congress and the Obama Administration to address the crippling credit crunch that continues to plague small businesses in the United States, as well as to make additional sources of capital available to existing and aspiring small-business owners.

The study also underscores the possible need for small-business credit card reform and closer scrutiny of the practices of the credit card industry as a whole, which has come under fire from many small-business advocates and trade associations.