Choosing Between a Rock and a Hard Place? How Firms in Financial Difficulty Prioritize Their Debt Payments

Abstract

Using data provided by Equifax on 35,000 small and medium-size businesses engaged in equipment finance during 2005-2019, this article investigates how firms prioritize debt payments to various bank and nonbank lenders when they can make only some of the payments. While we explain a relatively small part of the total variation in firms' choices, two patterns stand out. First, firms make payments on loans and conditional sales before true leases. Second, firms pay independent finance companies before bank-related lenders and captive finance companies. We note that the latter result could reflect differences across lender types in customer relationships and lender specialization. We then confirm the importance of those factors by showing a firm is more likely to risk a missed payment to a lender of given type if it has a close relationship with the lender or the lender specializes in the firm's industry or the equipment serving as collateral.

JEL Classification: G20, G21, G23, G32, L14