Success Tip: Curb Credit Card Debt
 By Amanda C. Garrett

If you’re just jump-starting a small business, be wary of running up a big bill on your company’s credit card. That’s a caution offered by the Ewing Marion Kauffman Foundation, an entrepreneurship-focused nonprofit organization in Kansas City, Mo.

Credit card debt reduces the likelihood that a new business will survive its first three years of operation, according to findings from a study released recently by the foundation.

The study suggests that during many firms’ first few years of operation, their credit card debt increases and then eventually stabilizes to manageable levels, while firms with high credit card debt close, and successful firms start paying off their debt.

The study, The Use of Credit Card Debt by New Firms, bases its findings on data from the Kauffman Firm Survey (KFS), a panel study of new businesses founded in 2004 and tracked over their early years of operation.

“Numerous factors affect whether or not a new company survives,” says Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. “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.”

More than half of all new firms rely on debt financing when they begin operations, and a vast majority of these businesses rely on credit card debt to fill any equity gap.

Credit cards tend to appeal to small businesses for several reasons:

• They help small businesses manage their finances
• They streamline payments made by small businesses
• They’re easier to get than traditional bank loans or government business grants

Credit cards also smooth revenue streams and cash flow—especially at the startup phase of operations. And, unlike other types of loans, credit card companies will never ask how a small-business owner spent the money.

About 58 percent of the KFS firms relied on credit cards to finance operations in their first year of business. The study results found that every $1,000 increase in credit card debt increases the probability a firm will close by 2.2 percent.

“New businesses’ access to formal credit markets historically has been limited, a situation that has been exacerbated with the recent contraction of credit markets,” says Litan. “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.”

AFS Can Help
No matter how you finance your startup business, AFS offers benefits that will help you keep your financial house in order and your business running smoothly. Check out these and other benefits:

Accounting benefits:

• A-Systems Accounting Software
  Save 50 percent on small-business accounting software
• QuickBooks
  Save 20 percent and get free shipping on QuickBooks financial software

Payment collection benefits:

• FastCollect
  Collect on delinquent accounts and put your cash back in your hands
• National Credit Systems
  Low-cost, effective method for collecting on delinquent accounts

Management benefits:

• BizFilings
  Save on incorporation services for your small business in any state
• Credit & Debit Card Processing
  Credit and debit card processing at the lowest rate possible

(Posted October 2009)

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