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| Author: | Huyghebaert, N. Gucht, L. Van de Hulle, C. Van |
| Title: | The choice between bank debt and trade credit in business start-ups |
| Journal: | Small business economics
2007 : DEC, VOL. 29:4, p. 435-452 |
| Index terms: | debt credit entrepreneurship financial structure liquidation new enterprise |
| Language: | eng |
| Abstract: | This article explores the decision between bank debt and trade credit in business start-ups. Taking into account that trade credit is more expensive than bank debt, the trade credit and bank debt lenders tend to follow different liquidation policies. In a situation, where client companies face financial problems, the suppliers of trade credit are more willing to renegotiate the outstanding debt or grant additional debt than banks, which are more likely to liquidate borrowers. It is argued here that entrepreneurs choice of debt instruments mirrors this difference in liquidation policy between lenders. Consequently the choice is affected by the venture's risk of failure, the entrepreneur's private control benefits that are lost upon liquidation, and the liquidation value of firm assets. Based on analysis of data on 325 business start-ups, the results suggest that trade credit is more likely the choice of firms in industries with high historical failure rates and of entrepreneurs who tend to highly value private benefits of control. |
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