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Lender's Risk Assessment Based on Business Structure
A commercial bank is evaluating two loan applications for $500,000. Both applicants are startups planning to pursue identical, moderately risky projects with the same expected profitability.
- Applicant A is a corporation, where the owners' financial responsibility for business debts is restricted to the amount they have invested in the company.
- Applicant B is a sole proprietorship, where the owner is personally responsible for all business debts, and their personal assets can be used to repay them.
Assuming all other factors are equal, which applicant is likely to be charged a higher interest rate by the bank, and why?
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