Institutional Lending to Knowledge-Based Businesses

Abstract

New knowledge-based businesses (KBBs) have special difficulty accessing external financing, because they lack the usual collateral and financial history required by lending institutions. The importance of KBBs for economic development, especially in peripheral areas, is increasingly recognized, and there has been pressure on lending institutions to implement more flexible lending approaches to respond to the needs of KBBs. Whether and how Canadian lending procedures and attitudes and behaviors of financial institutions have been modified to meet the needs of KBBs is investigated. The study was based on interviews with executives and account managers in six chartered banks and four government agencies in 2000-2001.In addition, two mock business plans were drafted, one for a KBB and one for a more traditional firm. These were presented to 23 account managers for three stages of review: initial, due diligence, and final stage. It was found that specialized strategies, structures, and processes for lending are at present only partially developed, quite diverse, and still evolving. Evaluation and decision making are affected by organizational variables, such as strategies, structures, policies, and procedures. Nevertheless, findings indicate that institutions are taking steps to serve the needs of KBBs. In addition, the findings show that there was little consensus among lenders at the initial stage, but convergence of opinion occurred at the postreview stage. Data provide some support for conclusion that a lending culture sensitive to needs of KBBs has developed among specialist lenders. Finally, implications for researchers, entrepreneurs, and policy makers are offered. (TNM)

Keywords: Experimental/primary research, Knowledge-based firms, Firm financing, Lending practices, Startups, Loans, Early stage financing, Lending policies, Banking industry