Debt Financing, Survival, and Growth of Start-Up Firms

Abstract

We analyze how different forms of debt financing at the firm’s start-up affect subsequent firm outcomes. We find that, after three years, firms using debt at start-up — in particular, business debt but not personal debt — are significantly more likely to survive, and to achieve higher levels of revenues than are other firms. We provide evidence that superior outcomes are attributable not only to selection of better-quality firms by bankers, but also to subsequent monitoring by the firms’ bankers. We also examine a start-up’s decision to use credit; we find that better-quality start-ups are more likely to use credit, and are more likely to use business rather than personal credit.