Credit Card Financing Hurting Small Business

For start-ups and those with a poor credit history, though, cards offer the only viable lending option.

April 20, 2010

SARASOTA, FL - As traditional sources of financing have dried up during the ongoing recession, entrepreneurs are turning to credit cards to fund their business start-ups, and as a result, more businesses are failing, the Herald Tribune reports.

"A recent study by Robert Scott of Monmouth University found that every $1,000 increase in credit-card debt increases the probability a firm will close by 2.2 percent," said Alan Zell a Portland-based business counselor and author of a credit-card abuse study that warns against the temptation of financing businesses with credit cards.

Credit cards are tempting sources of capital because in many cases, businesses cannot find alternatives and they require less effort than developing a business plan and submitting the paperwork that is required for traditional bank-issued loans. However, Carmie Snyder, a vice president with Fifth Third Bank, recommends other options.

"There are lenders out in the marketplace that provide companies that have been in business for two years and have a good personal credit score up to $50,000 unsecured through the SBA Express program," Snyder said, adding the loans can be made quickly at rates lower than credit cards. "I think these loans make more sense than obtaining credit cards.

SBA-guaranteed small business loans have doubled this quarter compared to the same quarter last year, a sign that the recession is waning. As such, bankers are slowly returning to the lending arena, too.

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