In a fresh ZEW working paper (Brown et al. 2012), we examine the effect of outside credit scoring, bank size and bank expertise from the usage of bank credit for start-up businesses in Germany. Our analysis is founded on the KfW/ZEW Start-up Panel that covers 9,715 companies created in the full years 2005-9. Within computer-assisted phone interviews, start-up business owners supplied home elevators investments and funding sources. We think about three firm-level measures of credit availability: the incidence of bank credit (26% inside our test), the share of total company financing sourced from banking institutions (sample mean = 9%), and set up reports that are firm in accessing bank credit (15% within our test). It really is noteworthy that a sizable share associated with start-ups inside our test report don’t require external finance. The type of which do require outside finance, 65% usage bank credit, the mean share of bank credit to total financing is 22%, and 35% of companies report difficulties in getting bank finance. Start-up companies in high-tech companies are more inclined to report problems in getting bank credit (41%) compared to those in low-tech companies (36%). Information from the Start-up Panel is merged with information about each firmвЂ™s credit history as well as its primary bank connection, both given by Creditreform, GermanyвЂ™s credit bureau that is largest.
The effect of outside credit scores
We very first glance at how a very first statement of a credit score for start-up companies impacts their usage of bank finance. right Here we utilize the score policy by Creditreform to attend at least a before publishing a rating on a newly founded firm year. While just 28% of start-ups have actually a Creditreform rating within their 2nd 12 months of procedure, the share of companies having a score is 95% by the fourth/fifth year of presence.
Our outcomes reveal that after a credit that is external becomes available, it just impacts a businessesвЂ™ use of credit in the event that score contains negative information, for example. once the score is bad. More over, banks respond to bad ranks when financing in old-fashioned companies not in innovative industries. Companies in low-tech companies by having a rating that is bad less likely to want to make use of bank finance and possess more problems in comparison to businesses without any, fair, or good ranks. For high-tech organizations we try not to find significant results.
These findings claim that banking institutions remember the fact that outside ranks are less informative for high-tech businesses. Outside ranks depend on publicly information that is available business-to-business (trade-credit) relations. Generally speaking, credit agencies don’t use rating that is different for high-tech in comparison to low-tech companies. Alert to this, banking institutions appear to respond to bad signals by an rating that is external for low-tech companies.
The effect of bank size and expertise
For every single company, we identify the bank that is main through the Creditreform database. For every single of those banks we then utilize the whole Creditreform database (for start-up and established businesses) to ascertain how big is the financial institution (wide range of organizations served, weighted by labour force) in addition to expertise of this bank into the start-upвЂ™s industry (wide range of businesses offered in the exact same industry). Our outcomes claim that start-ups which have a relationship having a bank that is large less likely to want to make use of bank finance and report more difficulties in enabling bank credit. Even though the effectation of bank dimensions are statistically significant, its financial magnitude is reasonably tiny вЂ“ a growth of bank size by one standard deviation decreases the likelihood of utilizing bank credit bank by 1.6 portion points and escalates the possibility of reporting difficulties in enabling credit by 1.1 portion points. In comparison, 65% associated with start-ups inside our test usage bank finance and 38% report problems in accessing bank credit. Our outcomes further claim that bigger expertise for the bank within the firmвЂ™s industry doesn’t significantly seem to reduce problems in getting credit.
Our outcomes have actually crucial policy implications. Policymakers may be worried that the reliance that is increasing outside credit scores by banking institutions may increase credit constraints for start-up organizations, specially those who work in high-tech companies. We realize that this concern is unwarranted as banking institutions appear to rely less on outside ratings when lending to high-tech businesses in place of low-tech companies. Additionally, the trend towards more concentration when you look at the banking sector might have harmful impacts on credit supply for innovative start-up companies. We discover that start-ups that deal with bigger banking institutions indeed face more problems in getting bank finance. Nevertheless, this effect is fairly small plus it is applicable tor various types of start-ups вЂ“ low-tech and high-tech вЂ“ suggesting that a differential policy intervention for revolutionary businesses is unwarranted.