Having adequate funds is key to running a successful business. Cash is king. Experts have always stressed the importance of building company credit from the very beginning. But when it comes to debt, is there an ideal option? Should you avoid debt all together? Or apply for a personal loan or a business loan? A new study has provided some answers.
After analyzing data found in the Kauffman Firm Surveys Finance, professors Rebel Cole of Florida Atlantic University and Tatyana Sokolyk of Brock University in Ontario found that:
- Companies financed by personal debt actually performed worse than those with no debt at all.
- Companies that used business bank loans to finance their launch reported nearly twice as much revenue after three years as a startup of similar size that took on no debt.
- In addition, that same company financed by personal debt (e.g. home equity loan or personal credit card) had on average 57 percent less revenues than one that hadn’t borrowed.
- Companies with business debt generated, on average, more than four times as much revenue as one carrying personal debt.
- When survival rates were compared, it was discovered that the chance of making it past three years was 19 percent higher for business borrowers than for companies without debt.
So, what is the explanation? In Cole and Sokolyk’s opinion, it all comes down to a question of selection. They explained that businesses most likely to succeed are the ones that go to the bank for a loan from the beginning. Because the bank is taking a close look at the business, monitoring their progress and providing mentoring, the borrower’s performance increased.
And why does personal borrowing seem to predict poor performance? Again, Cole and Sokolyk point to selection. If a bank doesn’t feel comfortable to work with a business, they will steer them towards personal debt instead. Cole says this causes a lot of problems. Many entrepreneurs choose to skip the business loan and avoid the complicated process and jumping through hoops, opting for personal debt instead. In the long run, they are not doing themselves any favors.
“It’s really almost a story of financial literacy,” says Cole. “We still have millions of consumers who don’t have a credit score because there’s not enough information about them and their ability to repay a loan. Businesses are much worse, because there are far more of them that don’t borrow in the name of the firm. Probably half of them or more don’t have a borrowing track record.”
Believe it or not, there are alternatives to traditional business funding options and personal loans. Alternative providers specialize in providing high risk business loans. These funding options allow many business types and industries – banks turn away – secure the services and cash they need to operate smoothly, regardless of insufficient collateral and operating history. Bad credit or no credit is also not an issue. If you are struggling to find funding your venture needs to get started, consider seeking alternative options.
Business Funding expert, Michael Hollis prides himself in being able to help the backbone of America; small business owners. When he isn’t helping merchants, you’re more than likely to find him scuba diving the California coast or eating at one of LA’s tasty Vegan restaurants.