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Charge It And You Will Go Out Of Business! Really?

A lot has been made over the past few weeks about a study based on data from Ewing Marion Kauffman Foundation that has been interpreted by many as an indictment of using credit cards to fill a startup firms' equity gap. The study, by Robert Scott of Monmouth University (using Kauffman’s data) found that “every $1,000 increase in credit card debt increases the probability a firm will close by 2.2 percent.”

The study was based on a regression analysis of data from the Kauffman Firm Survey, which tracks a sample of new companies from the 2004 cohort of American start-ups.

Scott A. Shane, writing on the You’re The Boss blog on the NY Times site, correctly punches a few holes in this widely reported assertion, offering up another plausible meaning.

Another interpretation of the study’s results is that entrepreneurs whose businesses aren’t doing well tend to run up credit card debt faster than entrepreneurs who are doing well because they need to get cash somewhere. Because companies that aren’t doing well are also more likely to fail, we see a correlation between business failure and the size of credit card debt.

In research, things are rarely this easy, simple, or black and white. Shane correctly attempts to point out that correlation does not imply causation. Correlation can be a hint, but rarely are things as simple as saying that using a credit card for business financing will cause small business failure.

The misuse and misreporting of research and data continues to grow, and the lack of reporting staff and tight deadlines at most news outlets only contributes to growth in these misleading stories. And in this case, that’s a shame. I’m not a proponent of using credit cards for business financing, but in certain cases, it is a justifiable albeit expensive stop gap. Scaring small business owners away from what might be a valid solution to a short term need with pithy black and white axioms is both lazy research and lazy reporting.