Startups do better when they take on business loans up front
Business loans help double early-stage revenues compared to debt-free startups.
The right kind – and amount – of borrowing can propel a startup business toward higher revenues and better chances of survival in the early years, according to a new Journal of Corporate Finance study cited by Forbes.
After three years, startups that sought and secured business loans to get up and running generated about twice as much revenue as those that went without financing and four times as much revenue as those that took on personal debt through their owners’ credit cards or homes. Business-loan borrowers were also more likely, by 19%, to still be in business than those with personal debt or no debt.
However, too much debt – through business loans or otherwise – tended to darken the prospects of having a successful startup.
Part of the reasoning for how startup debt affects success could be tied to how it influences the business owner’s mindset, the study noted. Because of the extra hoops involved in obtaining a business loan, those that follow through could be more serious about their business plan. Also, lenders could be improving the rate of success by evaluating that business plan and providing feedback and mentoring. Or business-loan borrowers could be retaining their personal debt capacity as a fall-back to tap into later on while personal-debt borrowers may be maxing out their access to capital prematurely.
Whatever the reason, startups are also not building their credit history and reputation for future borrowing if they forego a business loan.
Learn more about the many different options available for business loans and financing, and compare minimum and maximum amounts, requirements and more in our guide to starting your business with a small business loan. Some lenders require you to have been in business for a certain length of time, while others look at your personal creditworthiness, annual or monthly sales or revenue, and even share of ownership.
In related news, more small businesses are turning to alternative loans for their business financing and small business lender Kabbage recently expanded its maximum credit line to $250,000.
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