According to a new study says that business loans are more effective and helpful for the startups to grow as compared with personal or any other types of loans. However, this study is with relevance to the Business 101 preaching that suggests all entrepreneurs to start building company credit almost immediately and the findings are surprisingly to the contrary to this 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 anathema.

The new study thoughvalidates that borrowing money by a business confers anenormous 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 coming 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.

The 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:

  • A startup business that is funded by a business loan 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.
  • On the contrary, when the same companies are considered and are financed by personal loan 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.
  • It was found that the company that was financed with a bank business loan generated four times more revenue on an average as compared with the company that was run and operated on personal debt.
  • When it come to the comparison of the survival rates of the companies in question, the researchers found that the businesses that was 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.
  • The survival rate for businesses with a personal debt was only slightly higher than the companies operating without any debt.

However, there is a limitto 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 have a fair chance of failing to succeed.

The possible explanations

The possible explanations of the Cole and Sokolykresults can be three distinct ones.

  • One, they say that the businesses are most likely to succeed are those that ask for a bank loanin 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 does personal loan results in such poor performance for startups an even worse than borrowing no money at all? Well, this may be due to the selection, especially if the banks are routing the failuresin personal debt management. They think that a business owner who borrows money immediately from a personal line usually have 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 donot 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 capitalconstrained right from the very beginningand 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 themto the banks for a business loan in the first place. However, Cole firmly says that all entrepreneurs who skip business loan 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 after knowing about its working process, pros and cons and your 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.

Hope you like this post. Comment below for any query, help, and suggestion.

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