Credit Card Debt Increases Chance of Firm Failure
Aug 17th, 2009 | By Dawn Rivers Baker | Category: ResearchAccording to a study released earlier this month from the Ewing Marion Kauffman Foundation, credit card debt appears to increase the likelihood of new business failure within its first three years of operation. The study, unexcitingly entitled The Use of Credit Card Debt by New Firms, uses data from the 2004 Panel Study of Entrepreneurial Dynamics, including two follow up interviews in 2005 and 2006, to examine credit card debt in young companies. It is no secret that credit cards are appealing to small business owners, particularly to microbusiness owners, for a variety of reasons. The flip side of all those pluses, however, is that credit card financing is expensive.
The data suggest that credit card debt increases in the first few years of operations for these new firms, and then stabilizes to “manageable levels” — that is, the firms are able to manage their cash flow sufficiently so that they begin to pay down that credit card debt by year three. Unsuccessful firms, on the other hand, are those that run up credit card debt that is higher than they can manage, causing cash flow problems and eventually the firm closes. In addition, a multivariate regression model was developed and tested using this data and the results showed that every $1,000 increase in credit card debt reduces the likelihood of firm survival by 2.2% during the first three years of operation. It may be time for economists and lawmakers alike to be less complaisant about microbusiness use of credit cards for their financing needs.
