Ratio Working Paper No. 232: Bank Financing of Start-ups – Findings from a survey

Abstract

In the paper we look at the bank lending routines of Swedish banks and their consequences for external financing of start-ups. Results from a questionnaire sent out to start-ups listed in the files of the Swedish interest organization “NyföretagarCentrum” were used. We looked at firms founded during the period 2010-2011, which can be considered family firms in terms of the ownership structure. The survey indicated that bank loans had to be backed up with personal assets used as collaterals and personal guarantees of repayment. Essentially, the entrepreneur personally takes all risk. The corporate form does not work. Risk-adverse persons with innovative business ideas will hesitate to realize their ideas. The consequences for economic growth and employment will be negative. Research questions posed in this study are:
• How do start-up firms finance their business?
• How much personal financial risk must an entrepreneur with a start-up business shoulder?
• How do they try to mitigate the financial risk through financial bootstrapping?
• What are the alternatives to bank loans?
Law and economics theories about how collaterals and safeguards can overcome the double trust problem between entrepreneurs and financiers will be used. Bank regulations play a decisive role in these cases.
The contribution of the paper is that it gives both a theoretical and empirical explanation to why start- ups have to be financed by the entrepreneur. There is a shortage of empirical studies that show this.