Having debt is bad for business? Think again. A new study says having a business loan is good for your business.
Business loans vs. personal loans
Starting in 2004, the Ewing Marion Kauffman Foundation collected annual data from around 5,000 companies. Using data from the Kauffman Firm Surveys, finance professors Rebel Cole of Florida Atlantic University and Tatyana Sokolyk of Brock University in Ontario conducted their own survey. What did they want to know? They wanted to see what type of loans businesses were choosing – if any – and contrast this with revenue and survival rates.
Their survey revealed some interesting facts about business loans and personal loans when it comes to companies:
- Companies that took out business bank loans had much better results when compared to businesses that didn’t take out any loans at all or businesses that took out a personal loan.
- Businesses that used a business bank loan from a bank for startup funding experienced nearly twice as much revenue after three years as startups of similar size that had no debt.
- A business financed by some form of personal debt had, on average, 57 percent less revenue than the businesses that had not borrowed at all.
- Businesses with business debt had a 19 percent higher chance of surviving past three years than companies with no debt, and a business with personal debt had a marginally higher survival rate.
Businesses that Apply for Funding are Better Planned Out
So what is the link between having business debt and revenue and survival rates? In Cole and Sokolyk’s opinion, it has to do with the selection process. Banks choose businesses that are organized, well structured and thoroughly planned. If a bank does not believe the business is strong, it simply will not extend credit.
However, that does not mean that all business turned down for a business bank loan are not full of potential. Many businesses are turned down for both business loans and personal loan options because they are part of an industry banks consider “too risky” to work with. When business owners find themselves in this situation, they often turn to alternative provider for a small business cash advance bad credit. A merchant cash advance for example, provides quick cash with a straightforward, simple collections process.
In conclusion, it would seem that debt is not necessarily an issue for businesses. It has more to do with the business funding option the owner chooses, and how organized the business is financially to manage that debt.
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.