Why Getting a Business Loan over a Personal Loan May Predict Success
A new joint study between Florida Atlantic University and Brock University in Ontario found that getting a business loan instead of a personal loan in the first year of enterprise is associated with increased success. According to the study of almost 5,000 businesses, companies that take on debt in the business's name are associated with "longer survival time and higher revenues." But businesses financed through personal debt — such as a credit card or home equity line — in the owner's name aren't.
The joint study found that businesses using bank financing to fund their startup reported almost four times the revenue as those businesses funded by the owner's personal debt.
Why do companies that get business financing perform better than those with personal financing? These reasons offer an explanation.
Business Bank Loans Require Homework
Applying for a bank loan requires preparation. In addition to filling out forms, applicants gather information about their industry, target market, local economy and competition. They present detailed business forecasts or plans, as well as current financial information and projections. The time and effort they invest may mean they have informed themselves about the challenges as well as the opportunities of running a business in their industry and local area. They're serious about doing the work and planning required for success.
In addition, financing a business through personal credit restricts borrowing to what's available to business owners as individuals. These owners can only borrow up to their credit card limit or the maximum of a home equity line, for example. On the other hand, business owners who get approved for business credit gain access to additional credit in the form of a new loan, credit line or credit card in the business's name. This allows the business to grow beyond the limitations of personal credit.
Banks Advise and Mentor Businesses They Lend To
Businesses that get business financing from a bank often receive a valuable bonus that can help position them for success. After a bank lends money to a business, it's invested in the company's success. And when a business performs well, the owner may need to borrow more money for expansion, which is also good for the lender. Banks are eager to monitor and mentor borrower businesses, study authors noted.
Business financing can help companies at all growth stages. To learn more about the loans and options that are best suited to your enterprise, speak to the business bankers at PNC Bank.
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PNC is a registered mark of The PNC Financial Services Group, Inc. (“PNC”). This article has been prepared for general information purposes by the author who is solely responsible for its contents. The opinions expressed in these articles are those of the author and do not necessarily reflect the opinions of PNC or any of its affiliates, directors, officers or employees. This article is not intended to provide legal, tax or accounting advice or to suggest that you engage in any specific transaction, including with respect to any securities of PNC, and does not purport to be comprehensive. Under no circumstances should any information contained in the presentation, the webinar or the materials presented be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy or should it be considered legal or tax advice. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc., will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission. Banking and lending products and services, bank deposit products, and Treasury Management products and services for healthcare providers and payers are provided by PNC Bank, National Association, a wholly owned subsidiary of PNC and Member FDIC. Lending and leasing products and services, including card services and merchant services, as well as certain other banking products and services, may require credit approval.