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Implications of Access to Capital by Young Firms

Who Seeks and Who Receives: Implications of Demand for and Access to Financial Capital by Young Firms

Sheryl Winston Smith and Alicia M. Robb

First published September 2011

In the aftermath of the latest financial crisis, policy-makers at all levels are concerned about the impact of the crisis on access to financial resources by young firms, particularly as major changes occur in bank-lending practices and uncertainties surround the implementation of financial reform legislation. In this paper, we analyze the types and sources of financing used in young firms over the years 2007 through 2009. We find differential outcomes for firms who applied for loans and received them, those who applied and were denied, and those which did not apply for fear of denial. We explore the factors that mitigate the decision to apply for a loan and the subsequent outcomes of firm survival and growth. Our work provides insights into the relative importance of supply and demand for financing both prior to and subsequent to the financial shocks. We leverage various measures and perceptions to disentangle the decision to seek bank loans from the likelihood of receiving a loan based on credit scores and other objective measures. We find that both tangible and intangible assets, particularly intellectual property, play a significant role in receipt of bank loans in the firms’ early years of operation.

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