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Does Credit Card Debt Harm Small Businesses?

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Credit Card Debt and Small Businesses

The Herald Tribune made sobering reading Monday (April 19) for anyone who owns a small business, and who also carries credit card debt. That's because it ran a story that said: "...every $1,000 increase in credit card debt increases the probability a firm will close by 2.2 percent."

It would be comforting to imagine this is one of those statistics than imaginative journalists dream up when bored and hungover on Sunday afternoons. But, sadly, not. It's a direct quote from a study published by the Ewing Marion Kauffman Foundation (The Foundation of Entrepreneurship), and written by Dr. Robert H. Scott, who's an assistant professor of economics and finance at Monmouth University.

Credit Cards and the Entrepreneurial Myth

Dr. Scott's report, entitled The Use of Credit Card Debt by New Firms, highlights how leveraging credit cards to finance ventures has become a part of the mythology of American enterprise:

United States pop culture is filled with many examples of creative entrepreneurs using credit cards to jumpstart their businesses. Spike Lee's first movie was funded by maxing out his credit cards, which resulted in launching his career as a director. The Blair Witch Project, a film that grossed more than $250 million, was funded almost exclusively with credit card debt totaling around $35,000...

Unfortunately, the unwelcome outcome for most who risk all on a throw of the metaphorical dice is that they lose all. The reason Spike Lee and the producers of the Blair Witch Project are so famous is only partly because they make (or, maybe, made) good movies. It's also because they beat the odds. And--by definition--that gives them rarity value.

The Business of Credit Card Use

The Herald Tribune piece suggested, at least in part, one reason why credit card use is now seen by small business owners as essential. There was a time--not that long ago--when new ventures were mostly funded by investments from the entrepreneur's friends and relations. But in the current economic climate, few individuals feel secure enough to bet their future on someone else's vision, no matter how loved those budding businesspeople are.

When a Credit Card Offers Business Benefits

Of course, just because credit card use must be carefully managed by entrepreneurs doesn't mean that business people should shun them. On the contrary, ABC News yesterday (April 18) singled out one business card that provides exceptional rewards for users. The ABC News report said:

"...I'm a fan of the The Business Platinum Card® from American Express OPEN. The Platinum card lets you convert points from your Platinum card to frequent flier miles on multiple airlines, and you can redeem your points at various major hotels including properties. I've also saved hundreds of dollars redeeming my points for Hertz car rentals, even in the peak summer season."

And the writer went on to stress other advantages, including access to various airport lounges and significant discounts at hotels and resorts.

Published 04/19/10 (Modified 11/20/13)

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