Since the early 1980s, scientific observers and policy practitioners have drawn attention to the role of new firms for their positive contribution to employment and to local development (Piore and Sabel, 1984; Acs and Audretsch, 1993; Loveman and Sengenberger, 1991). Small is become beautiful but small is often perceived to remain difficult to be financed. Financial constraints are indeed among the most cited impeding factors for entrepreneurial dynamics to flourish (for a review, see Parker, 2004).
New firms are not profitable enough to be self-financed. Because of both informational standards and costs associated with initial public offerings, they cannot raise equity on financial markets. Those whose growth rate is not exponential are not the targets of venture capital funds or business angels. Finally, their external financing is mainly based on loans, especially banking loans.
In comparison with other creditors, banks benefit indeed from advantages in financing opaque firms, and in particular new firms. Banks are specialized in gathering private information and treating it (Freixas and Rochet, 1997) and, as they manage money and deposit accounts, they own highly strategic information on firms’ receipts and expenditures and on the way firms develop themselves or not (Ruhle, 1997, Diamond and Rajan, 2001). However, credit market is not perfect and, since Turgot (1766), Smith (1776) and Keynes (1930), the idea that some firms may suffer from a lack of access to credit is widespread.
Credit gap finds a strong theoretical support in the model of Stiglitz and Weiss (1981). Due to informational asymmetries, banks do not know the risk of projects although they can observe the expected returns of projects. In this situation, prices cannot clear the market; credit is allocated with rationing and equilibrium arises with a fringe of unsatisfied borrowers. This conclusion is not accepted by all the scientific community.
In particular, in the framework of De Meza and Webb (1987), banks know the return of any project if successful but not the probability of success and this situation leads to over-lending. More recently, research tends to consider the cases described by Stiglitz and Weiss (1981) and De Meza and Webb (1987) as the two polar cases of a more general model of financing new investment under asymmetric information (Boadway and Keen, 2004).
Despite any consensus does not exist from a theoretical point of view and because credit rationing could hamper small firms’ growth, an extensive empirical literature deals with credit rationing and small firms. In this article, we deal with this question in the French context of the mid-nineties. We focus on new firms which can be supposed to suffer more than the others from credit rationing if credit rationing may exist. These firms suffer indeed from a lot of backwards. Their risk of default is high. They are short of collaterals, particularly when they are innovative. They cannot produce any track record to bankers. Their informational system is not formalized enough and can generate informational asymmetries between managers and external investors.
This paper is organized in three sections. In the first section, we introduce all kinds of credit rationing new firms can suffer from. We define classical weak and strong credit rationing and introduce the concept of self rationing based on the theory of discouraged borrowers (Levenson and Willard, 2000; Kon and Storey, 2003). In the second section, we introduce the SINE surveys on new French firms by the French National Institute of Statistics (INSEE). These surveys gather individual data on entrepreneurs and new firms and allow us to build direct measures of financial constraints.
In the third section, we assess empirically the importance of credit rationing in entrepreneurship. We show that credit rationing “à la Stiglitz-Weiss” is not very widespread among new firms. However, we put into light other financial constraints that illustrate either the old theory of weak credit rationing or the new theory of discouraged borrowers. We stress the specific case of innovative start-ups and the determinant role of banking finance for new firms.
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