According to an article in the Dallas Morning News, a new study by the Ewing Marion Kauffman Foundation revealed that new businesses using credit card debt to finance their ventures are less likely to survive the first three years.
The article said:
"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."
Credit cards are an expensive means of financing a business and can eventually force new entrepreneurs to file bankruptcy. The credit markets have traditionally been very difficult to access for new businesses; but credit cards have been and still are easy to get and use. Because of this, many new businesses use credit cards to buy supplies, merchandise, furniture and to even pay employees. The trouble starts once the credit card debt begins to explode beyond a level that is affordable for the new entrepreneur.
This usually happens within the first three years, leaving the business struggling to pay bills and avoid bankruptcy. And depending on how the credit card agreements are structured, entrepreneurs may be personally liable for the credit card debt their business accrues. Most creditors ask for personal guarantees from new business owners making personal liability a reality for most new entrepreneurs.
As job losses mount and many workers find it difficult to secure comparable work, many are exploring business ownership. But new entrepreneurs should tread cautiously if they intend to use credit card debt to fund their new venture. If the business is not profitable in a short period of time that credit card debt could sink them faster than long-term unemployment ever would.