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According to a new study says that startup business loans are more effective and helpful for startups to grow as compared with personal or any other types of loans.
However, this study is relevant to the Business 101 preaching that suggests all entrepreneurs start building company credit almost immediately and the findings are surprising to the contrary to these suggestions.
The advice of Business 101 has always caused continual annoyance and resentment for a specific variety of DIY business owners. These business owners, startup or otherwise, find debt to be a kind of anathema.
The new study though validated that borrowing money by a business confers an enormous advantage for any new business but it is only true when the debt is taken out in the name of the company and not in the name of the owner of the company.
Ideally, it is a proven fact that companies that are set up and funded by personal debt actually perform worse than those companies that do not have any type of debt at all.
These facts and findings are surprising but come from reliable and renowned sources such as finance professors Rebel Cole of Florida Atlantic University and Tatyana Sokolyk of Brock University in Ontario, these are hard to ignore.
There are also several useful data collected from thousands of companies provided by the Kauffman Firm Surveys that corroborates the same fact.
Startup Business Loans: Facts and Findings
The facts and findings of the new study regarding financing a startup business with a business debt alone have also shown the following results:
1. A startup business that is funded by business loans from bank finance its initial proceedings generate nearly twice as revenue as a startup of similar size and nature that took on no debt after three years.
2. On the contrary, when the same companies are considered and are financed by personal loans such as a credit card or a home equity loan it earned 57% less revenue on average than the one that did not take any loan at all.
3. It was found that the company that was financed with a bank business loan generated four times more revenue on average as compared with the company that was run and operated on personal debt.
4. When it comes to the comparison of the survival rates of the companies in question, the researchers found that the businesses that were financed by a business loan had a 19% higher chance to make it to the first three years and past it as compared to the businesses that did not have any debt at all.
5. The survival rate for businesses with personal debt was only slightly higher than the companies operating without any debt.
However, there is a limit to the debt as to how much of it is helpful for a startup. The study also found that the companies that took on more debt than they could afford to have a fair chance of failing to succeed.
The possible explanations
The possible explanations of Cole and Sokolyk’s results can be three distinct ones.
- One, they say that the businesses that are most likely to succeed are those that ask for a bank loan in the first place.
- Two, applying for such a loan will need time and will consume other resources and therefore when a business goes for a loan it indicates that the business is serious in its objectives. However, the banks are also good judges to identify a potentially successful business.
- Three, ideally taking a business loan from a bank means the bank will not only take a look at the business but it will also help you in your better performance by constant monitoring and mentoring.
Now the question is, why do personal loans result in such poor performance for startups and even worse than borrowing no money at all? Well, this may be due to the selection, especially if the banks are routing the failures in personal debt management.
They think that a business owner who borrows money immediately from a personal line usually has less room to grow as it is sure that the borrower has used up some of that debt capacity of the firm.
Moreover, firms that do not borrow in the name of the business owner usually retain their debt capacity so that they can use it as and when required in the following years to come.
These firms are ideally capital-constrained right from the very beginning and therefore will have a proper budget in place to spend less on investments and avoid unnecessary expenses to generate more revenues in the future.
All about financial literacy
Since the researchers are not sure about the exact person selecting, they cannot pinpoint it is the banks picking the winners or the businesses that opt to present them to the banks for a business loan in the first place.
However, Cole firmly says that all entrepreneurs who skip startup business loans for their startup and opt for home mortgage straightway no matter for whatever reason are not doing any good for their businesses.
It is all about financial literacy. There are several people who still do not have a solid credit score due to lack of information about it, their ability to repay a loan, and businesses are much worse as most of them do not borrow at all.
Paying off business debts
However, taking on a business loan also means you will have to pay it back to the bank as well. If you have multiple such debts then consolidating them is the best way to do so. Consult the experts and consolidate your debt with the help of National Debt Relief after knowing about its working process, pros and cons, and affordability.
It will be unwise to take on any loan without proper knowledge about the consequences even if it eases your finance by combining multiple debts into one. This is because a debt consolidation loan will not reduce the amount outstanding but will reduce your monthly payments and extend your loan tenure significantly.