We investigate the effects of the recent financial crisis on start-up financing and survival using a data set that covers all Belgian new business registrations between 2006 and 2009. We find that bank debt is the single most important source of funding, even for start-ups founded during the crisis. However, start-ups founded in crisis years use less bank debt and have a higher likelihood to go bankrupt, even after controlling for their creditworthiness. These effects are stronger for start-ups that are more dependent on bank debt, such as startups founded in bank dependent industries and start-ups founded by entrepreneurs who are more likely financially constrained.

Introduction

The recent financial crisis has increased concerns among entrepreneurial finance scholars and policy makers about the financing and the survival of start-ups that may be the engines of economic growth. Although scholars have studied the capital structure of start-ups (e.g., Cassar, 2004; Cole and Sokolyk, 2015; Cosh et al., 2009; Cumming, 2005; Huyghebaert and Van de Gucht, 2007; Robb and Robinson, 2014), to date, we lack a deep understanding of two defining questions in entrepreneurial finance, namely: (a) how does credit availability at the time of founding determine how capital is allocated to start-ups and (b) how does this influence start-up survival? The impact of credit availability on the financing and survival of start-ups is theoretically ambiguous.1 On the one hand, Stiglitz and Weiss (1981) argue that frictions in capital markets may prevent start-ups, arguably the most informationally opaque firms, from accessing formal debt markets. Moreover, debt financing may be inappropriate for start-ups and increase their probability of going bankrupt (Carpenter and Petersen, 2002; Laitinen, 1992). This literature suggests that bank debt and hence credit availability plays a negligible role in the financing of start-ups and, if anything, may increase start-ups‘ probability of going bankrupt. On the other hand, Bolton and Freixas (1990) argue that riskier firms, such as startups, prefer to use bank loans. Moreover, market imperfections may force efficient start-ups to exit due to a lack of funds. By securing access to formal debt financing, entrepreneurs may relax financial constraints, which contributes to firm survival (Åstebro and Bernhardt, 2003). This literature suggests that bank debt and hence credit availability plays a crucial role in the financing and survival of start-ups. In this paper, we address at least two hurdles that have refrained scholars from studying the effects of credit availability at the time of founding for start-up financing and survival. A first hurdle is the scarcity of data on start-ups. In many countries, start-ups are not required to publicly disclose their financial statements. Data scarcity explains why relatively few scholars have investigated the financing of start-ups, have relied on (survey) data of startups founded in one particular year (e.g., Cerqueiro and Penas, 2016; Cole and Sokolyk, 2015; Robb and Robinson, 2014, all rely on start-ups founded in 2004), or have focused on nonrandom samples of start-ups applying for financing at one particular financial institution (e.g., Cressy, 1996; Fracassi et al., 2016). We take advantage of the Belgian setting, where all nonfinancial firms have a legal obligation to annually file their financial statements, to construct a comprehensive sample of start-ups founded before and during the recent financial crisis. Our data allows us to provide first-time evidence on the role of credit availability at founding for the financing of start-ups by focusing on start-ups founded in periods where credit conditions were fundamentally different.