John Tozzi of BusinessWeek.com recently wrote an article about startup companies using small business credit cards to finance their business. A study by the Kauffman Foundation indicated that new businesses that use small business cards are more likely to fail. Specifically, the chance a new business will fail goes up by 2.2% for every $1,000 of credit card debt.
As banks give out fewer loans, credit cards have become popular as an alternative source or financing. However, if a small business is consistently carrying a balance on its credit card, there’s a good chance that the business it is on the decline. Interest rates on small business credit cards have skyrocketed due to higher delinquency rates among these companies.
Tozzi refers to a report conducted by Robert Scott, a researcher who took the data from the Kauffman Firm Surveys from 2004-2006. Scott admits in his report that, “With the recent contraction of credit markets, many new businesses will face difficulties in accessing traditional forms of credit…” Tozzi points out that one of the most readily available sources of financing to small businesses is also the main contributing factor causing them to fail. Unfortunately, credit card reform laws put in place by President Obama earlier this summer do not give small businesses the same advantages that consumers will now enjoy. However, Congress has been working on amendments to the credit card reform bill to give small businesses some of these advantages.
Luckily, small businesses have another financing option available to them: factoring. Instead of waiting weeks or months to be paid by their customers, companies can sell their receivables to a factoring firm and receive cash immediately.
To read the entire BusinessWeek.com article, click here: Credit Card Debt Hurts Startups