Resourceful financing by new firms : the use of multiple credit sources

Abstract

New firms face financial constraints that could hinder firm performance. Yet founders exhibit persistence and resourcefulness in building their new ventures and finding solutions to their financial constraints. The use of financial theories that focus on financing costs, profit maximization, and valuation of firms draws attention to the question of whether entrepreneurs increase survival and growth prospects for their firms through resourcefulness in financing (e.g. using multiple credit sources) or instead make suboptimal financing decisions (i.e. when being resourceful in their financing) that actually decrease the probability of new venture survival and high growth rates. My dissertation examines if being resourceful in financing in the form of multiple credit source usage is beneficial to the performance (survival and growth) of new firms. A theory of resourceful financing by new firms using multiple credit sources is developed based upon financial constraints, credit rationing, and capital structure theories (pecking order theory and financial growth cycle theory). The study incorporates a six year longitudinal design and mixed statistical methods to test hypotheses and perform sensitivity analyses to better understand this specific form of resourceful financing activities of new firms. The results suggest that the use of multiple credit sources is positively related to growth rates for firms that are growing above average, thus supporting the theoretical framework proposed in the study with boundary conditions. However, for firms that are growing below average, multiple credit source usage is found to be negatively associated with the survival rates. This suggests that founders should be resourceful in their financing options only when they are growing quickly and they should not use multiple credit sources when they are not growing or as a means to get out of a dire financial situation. The use of multiple credit sources cannot be used by creditors as a signal to determine the survival and growth of firms during their early years of operations. It is only after the third or fourth year that the use of multiple credit sources provides a positive or negative signal to external entities such as creditors. Limitations to the study apply.