The recent economic turmoil beginning in late 2007 has challenged businesses of all sizes. Firms have been faced with a great deal of uncertainty regarding sales and the economic outlook. At the same time, the recent downturn has dramatically impacted the availability and terms of credit. Over the 2007-2009 period, financial institutions have reported tightening their credit standards for approving loans (SLOOS).
Many small business owners rely on personal assets to guarantee or collateralize loans for their firms. As their equity in real estate holdings has generally declined in value during the recent turmoil, owners' ability to tap into personal balance sheets to secure their business credit needs has also shrunk (NFIB 2010).
This paper examines the effects of credit availability on small firm survivability over the period 2004 to 2008 for non-publicly traded small enterprises. We develop failure prediction models for a sample of small firms that were confirmed to have been in business as of December 2003, with particular attention to the impact of credit constraints.
We find that credit constrained firms were significantly more likely to go out of business than non constrained firms. Moreover, credit constraint and credit access variables appear to be among the most important factors predicting which small U.S. firms went out of business during the 2004-2008 period even though an extensive set of firm, owner, and market characteristics were also included as explanatory factors.
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Examining the Impact of Credit Access on Small Firm Survivability
