How Do Start-Up Firms Finance Their Assets? Evidence from the Kauffman Firm Surveys

Abstract

Using Kauffman Firm Surveys of U.S. start-up firms, we find that about 25% of firms report 100% equity financing of their initial assets. For the remaining 75%, we analyze their sources of credit, which we separate into three groups — trade, personal, and business credit. In addition, we examine which firm and owner characteristics explain a start-up’s decisions to use credit and, conditional upon using credit, what type to use. We find that, at start-up, the majority of firms (55%) rely upon personal credit, but that a sizable fraction of firms also use business (44%) and trade (24%) credit. As firms develop, they decrease the use of personal and increase the use of business credit. Firms are more likely to use credit at start-up when they are larger, more profitable, more liquid, have more tangible assets; and when their primary owner has more experience and more education. Black-owned firms are less likely to use credit. Among credit-users, larger firms are more likely to use trade and business credit but less likely to use personal credit; corporations and firms with more current and tangible assets are more likely to use trade and business credit but are less likely to use personal credit; firms with better credit scores are more likely to use business credit; multi-owned firms are more likely to use business credit but are less likely to use personal credit; owners with more prior start-ups are less likely, while female owners are more likely to use personal credit.