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Small Firm Use of Debt: An Examination of the Smallest Small Firms

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  • Susan Coleman

    (University of Hartford)

Abstract

Access to capital is an on-going challenge for small firms. Capital is required to address a broad range of needs: to cover start-up costs, to provide working capital, to secure facilities or equipment, and to hire employees. Most small firms are at a relative disadvantage, because they are too small to access the public debt and equity markets. Similarly, they are typically too small to show up on the radar screens of venture capitalists on patrol for the next potential hot IPO. Alternatively, very small firms are heavily reliant on bank loans, trade credit, and informal sources of capital including loans from family and friends. Entrepreneurial finance literature typically segments small firms into two types. "Entrepreneurial firms" are those that start out small but have the objectives of growth, profitability, and eventually, perhaps, an IPO. "Lifestyle firms", on the other hand, are firms that are small and intend to remain small. The point of this distinction is that firms of different size might be expected to have different types of objectives. Correspondingly, one might expect different attitudes toward and use of various sources of capital. This paper will use data from the 1993 National Survey of Small Business Finances (NSSBF) to examine the financing strategies of very small firms, a largely understudied segment of the small business market. Specifically, it will examine the types of debt capital used by the smallest small firms and compare their usage to that of somewhat larger small firms. Further this article will attempt to determine the variables that predict the use of debt capital and externally acquired debt capital by small firms and larger firms. Finally, it will explore the extent to which smaller and larger firms apply for external debt capital and the extent to which they are approved for loans.

Suggested Citation

  • Susan Coleman, 2002. "Small Firm Use of Debt: An Examination of the Smallest Small Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(1), pages 51-76, Spring.
  • Handle: RePEc:pep:journl:v:7:y:2002:i:1:p:51-76
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    References listed on IDEAS

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    1. Rebel A. Cole & John D. Wolken, 1995. "Financial services used by small businesses: evidence from the 1993 National Survey of Small Business Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 629-667.
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    8. Frederick C. Scherr & Timothy F. Sugrue & Janice B. Ward, 1993. "Financing the Small Firm Start-Up: Determinants of Debt Use," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 3(1), pages 17-36, Fall.
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    Cited by:

    1. Nguyen, Nhung & Luu, Nhung, 2013. "Determinants of Financing Pattern and Access to Formal -Informal Credit: The Case of Small and Medium Sized Enterprises in Viet Nam," MPRA Paper 81868, University Library of Munich, Germany, revised May 2013.
    2. Khan, Muhammad Arif, 2022. "ESG disclosure and Firm performance: A bibliometric and meta analysis," Research in International Business and Finance, Elsevier, vol. 61(C).
    3. repec:aly:journl:201711 is not listed on IDEAS

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    More about this item

    Keywords

    Bank; Lending; Debt; Small Firm; Small Business;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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