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Credit Card Debt Can Doom Startup Businesses, Report Finds

Written by Ken Gaebler
Published: 8/7/2009

Acquiring high credit card debt in the first three years of a startup's operations increases the likelihood that the business will fail, said a recent report from the Kauffman Foundation.

With small business loans increasingly difficult to attain due to the recession and credit crunch, many small businesses and entrepreneurs rely on credit cards to finance their startups, often acquiring hefty debt levels.

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However, according to the latest Ewing Marion Kauffman Foundation news, for entrepreneurs this strategy could be the kiss of death.

A study released this week by the foundation found that for every $1,000 increase in credit card debt during the first three years of a startup's operation, the likelihood that the business will fail increases 2.2 percent.

"These findings suggest that credit card debt increases and then eventually stabilizes to a manageable level during many firms' first few years of operation," the report read, "while firms with high credit card debt close and successful firms start paying off their debt."

Credit cards are often seen as an easy way to manage finances and streamline payments - especially considering their ease of access compared to bank and government loans - but the high interest rates make this an expensive way to fund a business, the report said.

The foundation estimated that 58 percent of small business startups rely on credit cards to finance their operations.

Less than half of startup businesses survive longer than five years, according to U.S. Census data cited by the New York Times.

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