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04-09-2017 - - 0 comments
Make that cheque out to The Optimist

 

 

Want to increase a startup’s chances of getting bank financing? That Obama-inspired credo may help: “Yes wecan! Yes we can! Yes we can!”

Or so the latest academic research has claimed.

Professors Cole, Dai and Ivanov find that optimism can also be highly infectious when making commercial loanapplications. Small business founders that imagine a bright future for their company are more likely to secure bank loan financing. And there’s more. Their debt also comes at a lowerinterest rate and is less likely to require personal guarantee or collateral!

So how was this proven? The team studied 943 first time loan applications by small US firms in the early 2000s. They assessed each applicant’s optimism based on the difference between 1) their expectation of being able to secure bank credit and 2) the objective probability of the firm being able to obtain bank credit – looking at the dry statistics of all past bank approvals and the firm’s financial and business profile. A big difference between 1 and 2 indicatives a high level of optimism – i.e. “of course my 3-months old dating app for vegans will get a cheap unsecured bank loan!”.

The significant explanatory power of this metric was held to considerable scrutiny. Is it that optimistic entrepreneurs simply apply to more banks? Not the case – in fact, results show the opposite. Or could the positive attitude simply stem from more business acumen? No, that’s all controlled for. Or is there some hard-to-measure “X-Factor” that bankers recognise in the business model of Mr Positive? Also unlikely, as the researchers control for the banker’s expected knowledge of the applicant firm.

Or, maybe the secret sauce is that smirk on your face. Either way, don’t get rid of it as it may be your ticket to a big fat Approved stamp on your next loan application.

 

 

Dai, N.; Ivanov, V.; Cole, R.A. (2017). “Entrepreneurial optimism, credit availability and the cost of financing: Evidence from US small businesses

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