Kauffman Study: Credit Card Debt Reduces Startups' Chances of Survival

Although conventional advice for startups is that they finance partially through bootstrapping, including the use of credit cards, a new study from the Ewing Marion Kauffman Foundation suggests that startups with credit card debt have a lower chance of survival. The study's results are reported on the Wall Street Journal's website today.

The study, "The Use of Credit Card Debt by New Firms," was conducted by Robert H. Scott III, an assistant professor of economics and finance at the Leon Hess School of Business.

A statistical analysis in the report shows that for every $1,000 in additional credit card debt taken on by the firms studied, the chances of survival were reduced by 2.2%.

"More than half of all new firms rely on debt financing when starting operations," the report states. "A vast majority of these businesses rely on credit card debt to fill any equity gap. This debt financing can be very expensive. While credit card debt provides needed short-term funding, reliance on this type of financing may lead many businesses into a long-term liquidity drain that affects their financial stability -- and thus survival."

"Many factors explain why new businesses succeed or not," the study concludes. "The growth in credit card use among small businesses has raised the question of whether firms with credit card debt were less likely to survive during their beginning stages of development. This study shows that credit card debt does play a role in business closure in the first few years of operations. And, while it is not the only determinant of a business's stability, it appears to be an important factor in a firm's likelihood to survive."