Sources of finance/ debt finance Flashcards
What percent of start ups are financed internally and externally?
Internally = 85%, externally = 13%
Who investigated 160 start ups to find the percentage of internal/ external financing?
Fraser (2009)
What is agency theory?
The process of the bank ensuring that loan and interest payments are paid by the business on time
What will the bank ensure as a result of knowing that small businesses are of a higher-failure risk?
Get to front of creditor queue, charge higher interest, seek collaterals (e.g owners house)
What are the four signals of a small business being ‘creditworthy’
Relationship factor (using existing lenders), information (formal planning), collaterals (house/ other assets), entrepreneurial talent (experience/ skills)
What occurs (5 regularities) as a result of the entrepreneurial financial market being opaque? i.e what does the bank do as a result of not knowing 100% that a the business/ investment will be a success
Credit constraints, discrimination, higher interest rates, collaterals/ assets, strict loan terms
Give examples of internal finance
savings, family loans, family gifts, credit cards
Give examples of external finance
formal and informal VC, term loans, overdrafts, asset finance (hire purchase + leasing)
Costs of agency?
Drawing up and managing a contract, setting performance standards
Issues with collaterals?
Setting value of assets, actually gaining the assets when the business has failed (bailiffs)
Which country has strong evidence for discrimination against black people when obtaining loans? And by how much more are they denied?
USA. Almost double are denied credit in comparison to white people (Cavalluzzo and Walken, 2005)
What else could banks discriminate against?
Women, age
Why is the entrepreneurial market more opaque than the corporate finance market?
Start ups are usually sole traders/ partnerships and so don’t have to publish accounts etc.
