In the past, micro-businesses and startups relied on finance loans from lending companies and banks to set up shop. Over time, the establishments paid off these loans and managed to earn enough income to grow steadily. In recent years, however, entrepreneurs have turned to credit card financing for their needs.
The reliance on credit has had an unexpected effect on small businesses, experts say. While credit has given micro-businesses the opportunity to easily acquire necessary equipment and resources for a start up, the debts they have incurred are beginning to affect their survival as a whole.
A new study from the Kauffman Foundation revealed that for every $1,000 of card debt, a firm's chances of closing increases by 2.2 percent. The startling data comes as a surprise to many entrepreneurs who thought that having credit would have helped them gain an edge over competitors.
Research has also shown that 58 percent of small firms and startups used credit cards to run their businesses for the first year of operation. Micro-businesses that made use of traditional loans owe an average of $3,500 to lenders. Entrepreneurs who made use of credit cards, on the other hand, owe some $11,000 to card companies.
Some 59 percent of the small businesses included in the survey also had not employees when they started. A small portion, 18 percent, had three or more employees to start with. Robert Scott, a researcher who made use of the Kauffman Foundation findings, said that having credit does not necessarily mean the success or failure of the small companies. Having substantial balances on the cards, however, can spell the end for most small businesses.
Experts contend that most credit card problems start when business owners charge both personal and business expenses to the same cards. This makes it harder for entrepreneurs to keep track of and assess the health of their startups. Specialists say that shop owners should have separate cards for business and personal needs.
Scott also believes that the trend will continue especially with the economic slump forcing many entrepreneurs to rely on credit card issuers for support. Traditional lenders and business loans may become too unstable for shop owners to trust. Because of this, Scott says that there will be an unprecedented demand for credit cards among startups.
Card companies have been trying to tap into the relatively untouched market for years, researchers say. With the expected increase in demand, researchers say that entrepreneurs can suffer from more financial problems in the future.