August 27, 2009

• Survival of Small Business and CC Use, Pt.4
    Survival of the fittest

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  It is difficult to say for sure which variable has the greatest effect on the other. However, the Kaufmann study does suggest that a higher dependence on credit cards for financing new business startups and a tendency to carry higher debt balances reduces the chances of the organization's survival during the first three years in operation. Their results indicated that for every $1,000 in credit card debt, the business's risk for closure increases by 2.2%. On the other hand, there was no significant connection between the small business owner's decision to use credit cards in financing the startup of the new business and a higher rate of failure.

  So while the use of credit cards does not have a significant impact on the survival of the company, it would appear that a continued dependence and lack of management of debt does play a valuable role. However, using credit cards does have its advantages. They help owners finance and streamline payments across time; and they are easier to obtain than a business loan or government grant. Additionally, unlike a business loan, they do not require the development of a business plan. They can be used for virtually any expense and lenders don't care nor ask what the money was spent on. The lenders only concern is that the cardholder is making the minimum monthly payment.

  Despite the advantages, credit card use has a major disadvantage; the interest rate on the card's debt is much greater than would be with a traditional business loan. The average interest rate is 15% and in some cases may reach as high as 30%. Even though many companies that have used cards to startup and finance their businesses have experienced success, a greater majority have not. The key to success appears to be more about managing and stabilizing debt rather than making the decision whether to use cards or paper.

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