The trade-off between bank debt and trade credit for business start-ups: Financing costs versus liquidation policy.

Abstract

This paper investigates the trade-off between bank debt and trade credit for entrepreneurial start-ups. Specifically, we examine how the lower cost of bank debt is weighed against the more lenient liquidation policy adopted by suppliers. Both the riskiness of the venture and the entrepreneur's control rents influence this choice. Using unique data on 325 first-time business start-ups, we find that firms in industries with high historical failure rates and entrepreneurs who value private control benefits use less bank debt. These effects are even strengthened in case assets have a high liquidation value and thus banks are more likely to liquidate the firm following default.Research; Trade; Trade credit; Credit; Startups; Cost; Policy; Suppliers; Choice; Data; Firms; Industry; Entrepreneurs; Value; Effects; Assets; Default; Costs;