Getting credit puts your company in front of those who can not.A new study shows that borrowing money gives a big advantage in a new business. However, this only applies when the debt is in the name of the company. The companies financed by personal debt really perform worse than those without debt of this type.
The findings were made from the work of finance professors Expert of Florida Atlantic University and Tatyana Sokolyk of Brock University in Ontario. They used data found in KM Firm Surveys surveys, collected annually by the KM Foundation. Some 5,000 companies were surveyed and started operating in 2004.
The researchers concluded that after three years, a company that uses a commercial loan to finance its inception, has collected almost twice as much revenue as companies that have not taken over debt. An important detail is that the companies were of the same size.
The commercial loan helps, not even the staff …
On the other hand, the same company financed by personal debts (home loan or personal credit card) had, on average, a lower income of 57% than one in which there was no such type of loan. A company with corporate debt generated, on average, more than four times more revenue than one with personal debt.
Comparing survival rates, the researchers found that the chance of spending three years was 19% higher for companies without debt. The survival rate for companies with personal debt was only slightly higher than for businesses without any debt. With this, it is concluded that there is a limit to how much debt helps: the study finds that companies with more debt are also more likely to fail.
A bird in the hand is worth two in the bush
SCK Loan offer three possible explanations for their results. On the one hand, they say that the businesses most likely to succeed are those who apply for bank loans in the first place. But banks are also good at evaluating what makes a business successful. “If you get a loan on behalf of the business, then the bank is really believing the deal,” Cole explains. In addition, after having chosen potential winners, banks “monitor and mentor them,” which further improves the performance of borrowers.
But why does personal lending predict such a poor performance, worse than taking on any debt? It may be a matter of selection again, especially if banks are guiding the losers to personal debt.
Expert notes that a homeowner who first requests a personal loan line has less room to grow. “If a company buys a loan on behalf of the owner at its inception, it is already using part of its debt capacity. “Already while a company that does not do this, guarantees that debt capacity to use in later years when necessary,” he says. “The company has capital restrictions from the outset and end up spending less on investments that produce future revenues.”
We still have millions of consumers who do not have a credit score because there is not enough information about them and their ability to repay a loan. Businesses are much worse because there is a much larger amount that does not apply for credits on behalf of the company. A large majority do not have a loan history.