The Long-run Impact of Bank Lending Constraints and Other Economically Important Factors on SME Failure

Abstract

This paper uses a very large French panel dataset, a hazard rate model and a near-exhaustive range of explanatory variables to examine the impact of short and long-term bank lending constraints along with other economically important factors, on small business startup failure. Economically important factors turn out to be a relatively small subset of the original set of regressors and include measures of financial cost (short-term interest rates), bank lending constraints (at startup and later), prior unemployment, labour market experience and financial risk (the share of debts in total assets). Bank loan refusal at startup permanently raises the hazard of closure by a daunting 64-70%, while short-term interest rates and subsequent constraints on bank borrowing related to collateral availability also permanently increase the hazard of closure considerably. Thus, both early and later financial constraints seriously affect the businesses� survival prospects, controlling for a very large range of other factors. Finally, financial risk plays an important subsidiary role in startup failure as well, creating a risk that again does not vary over time. Thus, a significant percentage of entrepreneurs are beset by lending constraints into the longer run and do not learn to manage finance significantly better as their business develops.

Keywords: France, entrepreneurship, startups, panel data, failure, closure, survival, lending constraints, collateral, hazard rate, human capital, financial capital, statistical significance, economic significance, economic importance

JEL Codes: L25, L26, G33