Indebtedness for young companies: effects on survival

Abstract

Based on data from 7,350 Cameroonian companies created between 1990 and 2008, we study the link between the characteristics of indebtedness for young companies during their creation and survival period of up to three years, from three to five years, and beyond five years. We complement our quantitative analysis with semi-directive interviews of Cameroonian entrepreneurs to deepen our study. Our results are manifold. We show that access to bank loans during the creation phase, as well as the volume of loans or, to some extent, the debt ratio improve the probability of survival during the early years, but this effect fades away rapidly. The interviews shed light on the motivations of entrepreneurs, particularly of those with very small businesses. Finally, our work reveals the antecedent role of their social capital that facilitates their access to bank loans, and, therefore, the probability of company survival.

Does Initial Access to Bank Loans Predict Start‐ups' Future Default Probability? Evidence From Italy

“…That is, the more extensive the ability of start-ups to access bank loans in the initial stages of business activities, controlling for equity/total asset shares, the better able the firm is to survive over time and deal with market dynamics. This result is in line with the findings of some recent empirical papers (Boyer and Blazy 2014;Cole and Sokolyk 2018;Wamba et al 2017).…”

“…In the complete specification of the model (Table A1), for the control variables, among the most interesting results obtained (i.e., the results that are confirmed even when using the alternative instrument-bank branches), for brevity, we can point out the following. In line with previous works (Carter and Van Auken 2006;Cole and Sokolyk 2018;Wamba et al 2017), it appears clear that financial resources are important in explaining a firm's survival. In particular, the share of equity over the total assets has a significant (at the 1% level) and negative influence on a company's default.…”

“…Closer to our study, both in terms of results and robustness checks, are two papers (Cole and Sokolyk 2018; Wamba et al 2017) that empirically assess bank loans as a key determinant for start‐ups' success and probability of survival.…”

“…Closer to our study, both in terms of results and robustness checks, are two papers (Cole and Sokolyk 2018;Wamba et al 2017) that empirically assess bank loans as a key determinant for start-ups' success and probability of survival. Cole and Sokolyk (2018) use data from the Kauffman Firm Survey of 4,928 firms incorporated in 2004 and implement a Cox proportional hazard model to show that new firms that rely more on bank debt in the start-up phase experience a higher probability of survival.…”

“…These findings are also robust to selection bias due to the implementation of a two-step Heckman model. Wamba et al (2017) combine quantitative and qualitative methods to investigate the effect of indebtedness on survival for 7,350 young Cameroonian companies. The logistic regression performed reveals that both the access to and the level of bank loans in the start-up phase improve the probability of survival, even though this effect lessens over time.…”