How Do Start-Up Firms Finance Their Assets? Evidence from the Kauffman Firm Surveys
Rebel A. Cole
Driehaus College of Business at DePaul University
March 1, 2012
Using data from the Kauffman Firm Surveys to provide evidence on how U.S. start-up firms finance their assets, we find that about 25% of firms report 100% equity financing of their initial assets. For the remaining 75% of start-ups, we analyze their sources of credit, which we separate into three groups—trade credit, personal credit, and business credit. At start-up, we find that the majority of firms (55%) rely upon personal credit, but that a sizable fraction of firms also use business credit (44%) and trade credit (24%). As firms develop, they decrease the use of personal credit and increase the use of business credit.
In addition, we examine which firm and owner characteristics explain a start-up’s decisions to use credit and, conditional upon using credit, what types to use. We find that firms are more likely to use credit at start-up when they are larger, more profitable, more liquid, have more tangible assets; and when their primary owner has more experience and more education. Black-owned firms are significantly less likely to use credit at start-up.
Among firms that use credit, we find that larger firms are more likely to use trade and business credit and but less likely to use personal credit; firms with more current and tangible assets are more likely to use both trade and business credit but are less likely to use personal credit; firms with better credit scores are more likely to use business credit; corporations are more likely to use both trade and business credit but are less likely to use personal credit; firms with several owners are more likely to use business credit but are less likely to use personal credit; owners with more prior business start-ups are less likely to use personal credit; and female owners are more likely to use personal credit.
Number of Pages in PDF File: 56
Keywords: availability of credit, bank credit, capital structure, entrepreneurship, Kauffman, KFS, start-up, trade credit
JEL Classification: G21, G32, J71, L11, M13working papers series
Date posted: March 26, 2012
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