When it comes to starting your business, not all credit is created equal. A recent study found that companies that borrow under the business name have higher revenues and longer survival rates than those that take out debt in the name of the business owner. But using personal credit to fund your business is not uncommon — the same study found that 55% of companies reviewed relied on it to finance their start-up.“Before your business has credit of its own, it’s normal to use a personal loan,” says small-business growth expert Evan Horowitz. “I’ve self-funded most of my businesses, putting my own resources and credit on the line — then I hustle to make it happen.”Business loans may have benefits over personal loans, but there are ways to make personal loans pay off.
Personal loans vs. business loans
According to Rebel Cole, co-author of the study, “Debt Financing, Survival, and Growth of Start-Up Firms,” and a finance professor at Florida Atlantic University, there are two factors that may give business loans an edge over personal loans: increased scrutiny from banks and the option to use personal credit as a future safety net.Banks tend to monitor the health of businesses they lend to, but they don’t always know a personal loan will be used for business, Cole says.The study found that companies that start with a business loan have revenues about three times higher and a 19% greater chance of survival than those that start with other types of credit.While that difference may feel daunting for entrepreneurs whose only option is a personal loan or credit card, all hope is not lost. You can still use a personal loan to fund your business — you just have to be smart about how you use it.To increase the likelihood of success, prioritize aspects of the business that offer the highest return on investment. Horowitz recommends using the cash you borrow to “grease the path for more cash to come in quickly.”