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The "Liability of Newness" and Small Firm Access to Debt Capital: Is There a Link?

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  • Susan Coleman

    (University of Hartford)

Abstract

Literature pertaining to the “liability of newness†contends that newer firms face particular difficulties and a greater risk of failure. This article seeks to determine if “newness†is also a disadvantage in the acquisition of debt capital. Results indicate that newer firms were significantly less likely to have lines of credit and were also significantly more likely to have been turned down for their most recent loan. Even when we control for length of relationship with the primary financial services provider, personal guarantees, and collateral, younger firms were still more likely to be turned down for loans. Small firms are an essential part of the United States economy. According to the U.S. Small Business Administration (SBA), there were 22.9 million small firms, defined as firms having 500 or fewer employees, in the United States in 2002 (Small Business by the Numbers, 2002). In fact, small firms represent 99 percent of all firms in this country. They provide approximately half of Gross Domestic Product as well as the majority of new jobs. Small firms are also an important source of innovation in the development of new products, services, and technologies. Given the role played by small firms, it is in our interest to identify factors that contribute to their likely success. In keeping with that, studies of small firm survival and failure have repeatedly identified difficulties with financial management and an inability to secure adequate sources of capital as major contributors to dissolution (Gaskill et al., 1993), Lussier, 1996; Watson et al., 1998). Many small firms are launched with inadequate financial resources. To compound this problem, small firms, unlike larger, publicly-held firms, are unable to raise capital in the public debt and equity markets (Ang, 1991). Alternatively, they are restricted to sources of capital that include the owner’s savings, loans from family and friends, trade credit, and loans from banks and other financial service providers (Berger & Udell, 1998; Bitler et al., 2001). Even in the case of bank loans, however, small firms are more likely to be denied than larger, more established firms. As noted above, the inability to secure external sources of capital raises the risk of firm failure. On a slightly less dire note, inadequate capital may also restrict the firm’s ability to grow, to hire employees, or to introduce new products and services thus impairing profitability and growth in the long term.

Suggested Citation

  • Susan Coleman, 2004. "The "Liability of Newness" and Small Firm Access to Debt Capital: Is There a Link?," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 9(2), pages 37-60, Summer.
  • Handle: RePEc:pep:journl:v:9:y:2004:i:2:p:37-60
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    References listed on IDEAS

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    1. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    2. Marianne P. Bitler & Alicia M. Robb & John D. Wolken, 2001. "Financial services used by small businesses: evidence from the 1998 survey of small business finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 87(Apr), pages 183-205, April.
    3. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    4. Avery, Robert B. & Bostic, Raphael W. & Samolyk, Katherine A., 1998. "The role of personal wealth in small business finance," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 1019-1061, August.
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    7. Christine T. Ennew & Martin R. Binks, 1995. "The Provision of Finance to Small Businesses: Does the Banking Relationship Constrain Performance," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 4(1), pages 57-73, Spring.
    8. Susan Coleman, 2002. "Borrowing Patterns for Small Firms: A Comparison by Race and Ethnicity," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(3), pages 77-98, Fall.
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    10. David W. Blackwell & Drew B. Winters, 1997. "Banking Relationships And The Effect Of Monitoring On Loan Pricing," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 275-289, June.
    11. 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.
    12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    14. James S. Ang, 1991. "Small Business Uniqueness and the Theory of Financial Management," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(1), pages 1-13, Spring.
    15. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
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    Cited by:

    1. Ravi Chinta & Mee-Shew Cheung & Nejat Capar, 2015. "Double Whammy or Double Advantage: ¡°Foreignness¡± and ¡°Newness¡± as Determinants of Success in International Business," Journal of Management and Strategy, Journal of Management and Strategy, Sciedu Press, vol. 6(1), pages 76-87, February.
    2. Yan Zuo & Shenyang Jiang & Jiang Wei, 2022. "Can corporate social responsibility mitigate the liability of newness? Evidence from China," Small Business Economics, Springer, vol. 59(2), pages 573-592, August.
    3. Nguyen, Thi Nhung & Gan, Christopher & Hu, Baiding, 2015. "An empirical analysis of credit accessibility of small and medium sized enterprises in Vietnam," MPRA Paper 81911, University Library of Munich, Germany, revised 2015.
    4. Roman Bohdan & Elizabeth Tipton & Dean Kiefer & Arsen Djatej, 2014. "The Case of Minority Small Business Owners: Empirical Evidence of Problems in Loan Financing," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 3(3), pages 01-13, July.
    5. Muhammad Arif & Mudassar Hasan & Ahmed Shafique Joyo & Christopher Gan & Sazali Abidin, 2020. "Formal Finance Usage and Innovative SMEs: Evidence from ASEAN Countries," JRFM, MDPI, vol. 13(10), pages 1-19, September.
    6. Paola Bongini & Annalisa Ferrando & Emanuele Rossi & Monica Rossolini, 2021. "SME access to market-based finance across Eurozone countries," Small Business Economics, Springer, vol. 56(4), pages 1667-1697, April.

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    More about this item

    Keywords

    Liability of Newness; Access to Capital; Access to Debt; Small Firm; Small Business;
    All these keywords.

    JEL classification:

    • 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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