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