Think twice before relying on credit cards
Credit cards are an easy way to make quick purchases when cash is in short supply. But entrepreneurs better think twice before putting a credit card down to cover the costs for a new business.
According to a study conducted for the Ewing Marion Kauffman Foundation, the high cost of credit cards can pull down growth at a young firm and increase the chance that it will be unsuccessful in its first three to five years.
Glenn Muske, Oklahoma State University Cooperative Extension interim associate dean, assistant director, family and consumer sciences, said relying on credit card debt is extremely expensive and makes these businesses financially unstable.
In the study, nearly 6 out of 10 or 57.9 percent of approximately 5,000 firms used credit card debt to get their start. The report looked at use of credit cards in 2004 through 2006.
"Credit card interest rates and fees have escalated dramatically while credit limits have been dropped," Muske said. "Some mainstream card companies are charging rates of 30 percent or more in some cases. Unfortunately, some small business owners are relying more on plastic to start their business or fund an operation already in existence due to the fact other sources of money have dried up."
Small businesses have a big impact on the communities in which they are a part and when small businesses fail, these communities take a hit.
Muske said even a business with less than 10 employees can be a tiny economic engine by buying supplies, paying rent and taxes. They also contribute to the state unemployment insurance fund.
"Employee pay also puts cash into the local economy at gas stations, grocery stores and salons, as well as the federal Social Security fund," he said. "Small businesses are a great asset to Oklahoma's economy and the jobs they provide give us economic growth that is important for communities."