Abstract:

This study presents new findings on the factors determining SME survival and throws new light on the role of firm quality and collateral in SME credit rationing. Data consists of an unbalanced  panel of some 36,500 French startup firms and 11,600 closures covering the period 1994-2000. Using a hazard rate methodology we find that the initial conditions, specifically regarding market competition and the financial and human capital of the entrepreneur, are critical for firm survival. Their effects are moreover highly persistent. Specifically, the impact of initial credit rationing and collateral on survival is explored, controlling, for the first time in the literature, for firm quality. Whilst constituting only 7% of startups, rationed businesses have a permanently lower hazard of survival than their funded counterparts. Higher quality businesses and those with more collateral are less likely to suffer initial refusal. Collateral availability reduces the chances of rationing by offering security for long term loans.  The problem is that most businesses’ collateral (along with sales, assets, equity, etc) is fixed at startup and varies little thereafter. Our results therefore confirm the importance of policies assisting SMEs at an early stage, especially loan guarantee schemes.