Financing your firm with a credit card? Bad idea!

Think twice before slapping down that credit card to cover costs at your new business.

The high cost of plastic credit can drag down growth at a young firm and increase the chance that it will fail in its first three years, according to a study conducted for the Ewing Marion Kauffman Foundation.

For every $1,000 in unpaid credit card debt, a start-up business increases the probability that it will close by 2.2% on average compared with having no such debt, economics researcher Robert H. Scott said in a report released this month.

“Relying on credit card debt is very expensive and makes these businesses financially unstable,” said Scott, assistant professor of economics and finance at the Leon Hess School of Business at Monmouth University in New Jersey.

Yet almost 6 out of 10, or 57.9%, of the nearly 5,000 firms in the study used credit card debt to get started. The report looked at credit card use by the businesses in 2004, the year they all got going, through 2006.

The negative effect is probably higher today because credit card interest rates and fees have climbed dramatically while credit limits have been chopped. Even mainstream card companies are charging rates of 30% or more in some cases.

At the same time, more small-business owners are relying on plastic to start a business or fund an existing operation because other sources of money have dried up.

Read the full article at the LA Times

Wall Street: Bailed out - Main Street: Can’t get a loan

Where’s My Stimulus?

As the government throws billions at bailouts, Main Street is feeling left out.

During her four years as an entrepreneur, Trina Nelson has seen plenty of ups and downs. But nothing prepared her for the crisis last December, when the American economy lay in tatters and her Dallas-based catering business nearly collapsed.

“The phones stopped ringing,” says the founder of Par-T-Trayz Catering (motto: “From sushi to soul food”).

Unfortunately, Nelson, 38, has had a history of borrowing woes. In 2007 she needed a loan to stay afloat but was turned down by four banks because she didn’t have an established line of credit. (Like many startup founders, Nelson had used personal credit cards to fund her business; now her credit rating is “shot.”) Lenders said the amount she was seeking — $15,000 — was too small.

“They told me I wasn’t asking for enough money,” she recalls. “Why would I ask for more money than I needed?”

Read the full article at CNN Money