Enterprise UK Blog

Is the recession demarcating class divides in ‘Middle Britain’? On the one hand you have recession-proof Guardian readers lauding the miracle of frugality that the recession is bringing – cycling and recycling is King and they rejoice that the world has seen its senses and buys organic. On the other, we have the ultimate harbingers of the recession – the aspiring lower middle classes who have been unfairly characterised as ‘buy now, pay never’. Cheap credit – and in particular credit cards – are now a social pariah.

But it often appears to be this latter group that produces great entrepreneurs. Awe-inspiring tales of risking it all, with a lot of determination, characterise a lot of famous entrepreneurs. I wonder how many of these success stories had to rely on the kind of credit that we don’t like anymore.

Just last night on the Dragon’s Den a woman admitted starting her business with money she got from the bank for a house extension. Another example, The Blair Witch Project – a cult horror movie shot in a ‘home-movie’ style – was funded from $35,000 on maxed out credit cards. The line between inspiration and madness here seems very thin though – imagine telling your credit card company that you can’t meet the minimum payment because you spent all the money running around in the woods.

It was with this in mind that I was delighted to see a report from our US friends the Kauffman Foundation that might answer some of my questions. There was a lot in the report but I thought I’d summarise some of the key points (its about US companies, so may not be too applicable to the UK);

1.    58% of new businesses rely on credit cards in their first year of business
-  33% of these businesses carried a balance on their cards to the end of the year
2.    The average outstanding balance was $3,500 at the end of the year among all small business (although excluding those who had no credit card debt it was $11,000)
3.    The overall finding of this was that credit card debt reduces the likelihood of a business surviving in the first three years of operation – with a 2.2% increase in the likelihood of closing for every $1,000 on credit cards

However, in the first year, those with LESS on their credit cards were more likely to close (with $2,365 debt for closers and $3,638 for survivors). In the second and third year unsuccessful businesses had much MORE debt, however; growing 190% from the first year ($6,861), whilst only growing 40% across surviving firms. So although it appears that credit card debt may be bad in itself – it looks to be more about being able to manage the debt, rather than being bad for everyone who uses it.

So, my questions to you are; should we encourage the use of credit cards – particularly by those who can’t get other forms of credit? And, have any of you used credit cards to start your businesses?

On a more general note – what’s the biggest thing you’ve risked? Would you do it again?

This entry was posted on Thursday, August 20th, 2009 at 11:08 am and is filed under Celebrities, Entrepreneurship, Finance, Future Face of Enterprise, Global, Global Entrepreneurship Week, Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.