Do Credit Cards Hurt Your Chance of Success?

When I started my first business it was obviously brand new and banks do not usually lend or give you credit cards until you are about 2 years old. I ended up using many personal cards and extending my credit cards up to $80-100K in revolving credit. I know, that’s insane but that was the go-go days of the Internet boom. Eventually as all of you know, the bubble burst and those credit cards need to be paid – by me alone. Luckily, the balances were low and we had enough cash flow to pay almost everything off before I had to lay everyone off after 9/11. I spent the next year paying the remaining cards off and closing the accounts promising never to do that again.

This is why in my research for my new book “Rules for Entrepreneurs” I dedicate a chapter to starting up and another on financial management. So when I came across this article on GigaOm on a Kaufmann study about whether credit cards are a bad thing and actually hurt your chances of success, it must be shared with you my loyal readers. Here is a excerpt from that post:

Is your startup carrying a balance on its Visa? If so, you’d be well-advised to get it paid off. Credit card debt reduces the likelihood that a new business will survive its first three years of operation, according to a study released today by the Kauffman Foundation; it found that every $1,000 increase in credit card debt increases the probability a firm will close by 2.2 percent. However, to be clear: No relationship was found between using credit card debt to start a business and that business’s survival or closure.

The key appears to be how startups handle their debt, in particular when they’re able to pay it off. Of course, the ability to repay debt has always been tied to the overall health of a business, but the report makes clear that a higher balance is linked to outright failure. And it comes just as venture firms are putting less money into startups and banks are shying away from small business loans — forcing entrepreneurs to turn to credit cards. About 58 percent of the firms in the survey sample used credit cards in their first year of operations.

A June report published by the U.S. Small Business Administration Office of Advocacy notes that small business lending has decreased for loans between $100,000 and $1 million in value. Between 2007 and 2008 (the time frame measured in the most recent report) the number of loans fell by 23.3 percent, to 2.2 million from 2.9 million. When it comes to those under $100,000, the number of loans actually rose, by 15.7 percent, but the group believes such an increase can be attributed to continued efforts to promote small business credit cards. Which makes this research even more relevant.

The Bottom Line: Build a Business with Cash and Only Use Credit in a Few Places

Now, it is hard to be objective and a journalist here since I have lived through this in many different ways during many different economic climates. The bottom line of all of this is focus on building your business with the resources you have available. Don’t have any money? Save up first. Need to buy equipment? Use Craigslist or ebay. Get creative is what I am saying. What I am not saying is that credit is evil. If you have a signed contract with a deposit but with the Net 30 or longer government contract payment schedules you are gonna need operating capital to pay people. Just don’t use it as free money. It is a loan that must be paid back and with that focus you can build a business that is solid and if and when the tough economic climate comes again (it will and always does) you will not be so far out on a ledge that the only choice you have is for your company to jump and plummet to its death.

This entry was posted on Wednesday, December 16th, 2009 at 8:00 am and is filed under Capital Access, Entrepreneurs, Raising Capital, Resources, small business. You can follow any responses to this entry through the RSS 2.0 feed.


You can leave a response, or trackback from your own site.