HispanicBusiness

For some entrepreneurs, the path to riches began with a credit card.

Take the makers of the 1999 hit movie "The Blair Witch Project." The film was financed almost exclusively with $35,000 in credit card debt. It grossed more than $250 million.

But such incredible success stories are more the exception than the rule, according to a new study. The report, released today by the Ewing Marion Kauffman Foundation, concludes that credit-card debt significantly reduces the likelihood a new business will survive its first three years of operation.

"New businesses' access to formal credit markets historically has been limited, a situation that has been exacerbated with the recent contraction of credit markets," said Robert E. Litan, vice president of research and policy at the Kauffman Foundation, in a statement. "Consequently, entrepreneurs use credit card debt to finance their new ventures. Credit cards, however, are an expensive way to fund a business, and this new study suggests that escalating credit card debt negatively affects a new company's chance of survival."

The three-year study, which looked at nearly 5,000 new businesses and franchises from 2004 to 2006, found that most of them -- about 58 percent -- did indeed start with a small amount of credit-card debt.

But what often separates the successes from the failures is their discipline in paying it off. Companies that neglected to start significantly paying down the debt after one year were much more likely to meet an early demise, according to the study.

All told, 79 percent of the companies surveyed survived the three-year period. In 2005, the average credit-card debt of the businesses that closed had reached $6,861; for those that survived, it was $5,099.

In general, the study found that for every $1,000 increase in credit card debt, a company is 2.2 percent more likely to close.

Surprisingly, though, companies that stayed open through the first year in 2004 were more likely to use a credit card than companies that failed. Fifty-eight percent of the first-year survivors used a credit card, compared to 51 percent of the first-year flops. Not only this, but the surviving companies -- after that first year -- had racked up more credit card debt: $3,638, compared to an average of $2,365 among the failed businesses.

This suggests that it can be beneficial to use a credit card to get a company going, but it is extremely important to begin paying down the debt quickly.