Externe Kreditwürdigkeitsprüfungen durch Rating-Agenturen haben für Banken bei der Kreditvergabe an Unternehmen, aufgrund der verschärften Regulierung durch Basel II, erheblich an Bedeutung gewonnen. Die These, ungünstige oder fehlende Ratings seien der Grund dafür, dass insbesondere innovative, noch nicht etablierte Unternehmen ohne aussagekräftige Kredithistorie oft erhebliche Schwierigkeiten hätten, Bankkredite zu erhalten, bestätigt sich jedoch nicht. Eine Studie des Zentrums für Europäische Wirtschaftsforschung (ZEW) zeigt zwar, dass negative Ratings generell für Unternehmen den Zugang zu Krediten erschweren. Gerade für junge, innovative Unternehmen fällt dieser Effekt allerdings deutlich geringer aus als für andere

Brown, Martin

Degryse, Hans

Höwer, Daniel

Penas, Maria Fabiana

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Start-up financing : how credit ratings and bank concentration impact credit access

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ZEWpolicybrief
No. 1 | January 2013
Start-up Financing: How Credit Ratings and 
Bank Concentration Impact Credit Access 
Research Question  
and Relevance
Essential Issues
Start-ups, especially those in high-tech industries, are an important force for innovation. They 
contribute to the competitive success of the economy, and help to create new jobs. Bank financ-
ing is the most important source of external credit for newly established firms. In the last two dec-
ades, bank consolidation and regulatory changes such as Basel II have influenced banks’ screen-
ing processes, leading to a greater reliance on hard information. Yet newly established firms do 
not have a financial track record. Publicly available information like credit ratings is rarely avail-
able for new firms. 
Especially in the high-tech sector, a large share of young firms has reported difficulties in obtaining 
bank loans. For this reason, policy makers are worried that bank consolidation and the increas-
ing reliance of the banking sector on third-party credit ratings may have detrimental effects on 
the access of start-ups to credit, especially in high-tech industries. This, in turn, could harm the 
innovative capabilities and competitiveness of German industry. Yet are such worries justified? 
To answer this question, researchers examined how credit availability is impacted by start-ups’ 
credit ratings as well as the size and industry expertise of their primary bank. The study relied on 
firm-level survey data from the ZEW/KfW Start-up Panel.
v
By  M a r t i n  B r o w n ,  U n i v e r s i t y  o f  S t .  G a l l e n ;  H a ns  D e g r ys e ,  T i l b u r g  U n i v e r s i t y  
a n d  Ka t h o l i e ke  U n i v e r s i t e i t  Le u v e n ;  D a n i e l  H ö w e r,  Ce n t r e  f o r  E u r o p ea n  E co n o m i c  
Re s ea r ch  ( Z E W ) ;  a n d  M a r Í a  Fa b i a na  Pe nas ,  T i l b u r g  U n i v e r s i t y 
With regard to banks’ increasing reliance on credit ratings, our findings indicate that policy mak-
ers should not be worried when it comes to high-tech industries. This is because banks appear 
to rely less on third-party ratings when lending to high-tech firms as opposed to low-tech firms. 
However, the trend toward greater concentration in the banking sector may have a detrimental 
impact on the availability of credit to innovative start-up firms. The study reveals that start-ups 
dealing with larger banks face greater difficulties in obtaining financing. However, this effect is 
quite small and it applies to all types of start-ups – both low-tech and high-tech – suggesting that 
special policy intervention for innovative firms is unwarranted.
Key Messages
Key Messages
The study shows that when a credit rating is available it only affects a firm’s access to credit if the 
rating contains negative information, i.e. when the rating is bad. Moreover, banks appear to react to 
bad ratings when lending in traditional industries, but not in innovative ones. Firms in low-tech in-
dustries with a bad rating are less likely to use bank financing and have more difficulties compared 
to firms with no, fair, or good ratings. For high-tech firms, no significant effects were identified. 
Start-ups that have a relationship with a large bank are less likely to use bank financing and re-
port more difficulties in getting bank credit. While the effect of bank size is statistically signifi-
cant, the magnitude of the impact is relatively small. Our results further suggest that larger exper-
tise of the bank in the firm’s industry does not significantly reduce difficulties in getting credit. 
Research Question and Relevance
Newly created firms and high-tech start-ups in particular are engines of growth in many countries. Em-
pirical evidence from the United States and Europe shows that banks are the most important source 
of financing to new firms. However, start-up firms – both low-tech and high-tech – often face difficul-
ties in raising the required funds to implement their ideas. Complaints are often raised that banks 
are less willing to provide funds to start-ups, as these firms lack collateral and are more opaque to 
outsiders. Asymmetric information regarding creditworthiness and a lack of tangible capital may ar-
guably lead to stronger credit constraints for high-tech start-ups as opposed to low-tech start-ups. 
Over the last two decades, two developments in the banking industry have changed the way banks 
assess their prospective clients. First, banks increasingly rely on third-party credit reports when 
judging the creditworthiness of prospective borrowers. While empirical evidence suggests that in-
formation sharing through credit bureaus enhances credit availability (particularly for small busi-
nesses), the extent to which increased reliance on credit reports by banks may benefit start-up 
firms is unclear – especially in high-tech industries. Little research has been conducted to date 
on how credit information sharing affects credit availability to start-up firms. This, however, is an 
important issue. If banks rely strongly on credit history information for their credit assessment, 
this may have a negative impact on prospective borrowers without a credit history. This informa-
tion may be particularly important for a bank’s credit assessment when it deals with innovative 
start-ups, as information asymmetries are particularly strong. 
A second trend impacting lending behaviour is the ongoing consolidation of the banking indus-
try, which has led to fewer banks with more diversified lending portfolios. In Germany, for ex-
ample, the number of banks decreased by 53 per cent between 1990 and 2010. Figure 1 shows 
bank consolidation in Germany between 1991 and 2010, starting at an index value of 100. Bank 
mergers have taken place especially in the cooperative banking sector. Technical progress and 
bank regulation have particularly led local 
banks to be consolidated into a more ef-
ficient size. Also, a significant number of 
Sparkassen (savings banks) have merged 
within the public banking sector. 
As larger banks are typically more hierar-
chal, soft information about the creditwor-
thiness of borrowers may become more 
difficult to transport within the organisa-
tion when making lending decisions. This, 
in turn, may reduce the ability and willing-
Bank Financing for 
Start-up Firms
External Rating  
in Banks’ Decision 
Process 
Banking Market  
Consolidation
2 | ZEWpolicybrief ZEWpolicybrief | 3
v
 policy brief ZEW policy 
1991 1992 1993 1994 1995 1996 1997 1998 19992000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0
20
40
60
80
100
120
Public Banks Cooperative Banks Private Banks All Banking Groups
Figure 1: Bank consolidation in Germany 1991–2010
Source: Deutsche Bundesbank, 2012. Indexed values: Baseline of 100 in 1991
ness of banks to lend to start-ups, and especially those in high-tech industries, as their assess-
ment is more dependent on such information. On the other hand, larger banks may build industry 
expertise in a broader range of industries – for example, by employing loan officers who special-
ize in lending to new, innovative firms. This could theoretically increase the likelihood of lending. 
Methods and Data
We examined the impact of third-party credit ratings, bank size, and banks’ industry expertise on 
German start-up firms’ access to credit. Our analysis was based on data from the KfW/ZEW Start-up 
Panel, which encompasses 9,715 firms founded in 2005–2009. In computer-assisted telephone 
interviews, start-up entrepreneurs provided information on investments and financing sources. 
We considered three firm-level measures of credit availability: the incidence of bank credit (26 
per cent in our sample), the share of total 
firm financing obtained from banks (sam-
ple mean: 9 per cent), and whether or not 
the firm reported difficulties in obtaining 
bank credit (15 per cent in our sample). 
It is noteworthy that a large share of the 
start-ups in our sample did not require ex-
ternal financing. Of those that did require 
external financing, 65 per cent used bank 
credit. The mean share of bank credit to 
total financing was 22 per cent, and 38 
per cent of firms reported difficulties in 
securing bank credit. Start-up firms in high-tech industries were more likely to report difficulties 
in getting bank credit (41 per cent) than those in low-tech industries (36 per cent). Figure 2 pre-
sents the shares of firms that use bank financing, the share of bank financing to total financing, 
and reported difficulties by industry for all firms and those seeking external finance. Information 
from the Start-up Panel was merged with information obtained from Creditreform, Germany’s larg-
est credit bureau, on each firm’s credit rating and its main bank.  
Research Results in Detail
We first examined how the release of credit ratings for a start-up impacted access to bank financ-
ing. The German credit bureau Creditreform waits at least a year before publishing a rating on a 
newly founded firm. Figure 3 shows that rating availability increases with firm age. While only 
28 per cent of start-ups have a Creditreform rating in their second year of operation, 95 per cent 
of firms have a rating by the fourth and 
fifth year of their existence. Figure 3 also 
shows that approximately 55 per cent of 
young firms have a fair rating, and that 
about 40 per cent have a good rating.
Our results show that when a third-party 
credit rating becomes available it only af-
fects a firm’s access to credit if it contains 
negative information, i.e. when the rating is 
bad. Moreover, banks react to bad ratings 
when lending in traditional industries, but 
Start-up Panel Data
Impact of External 
Credit Ratings
2 | ZEWpolicybrief ZEWpolicybrief | 3
v
 policy brief ZEW policy 
Bank use Bank share Bank difficulties Bank use Bank share Bank difficulties
0 %
20 %
40 %
60 %
80 %
All Low-Tech High-Tech
All rms Firms seeking external nance
Figure 2: Bank financing of newly established firms by industry
Source: KfW/ZEW Start-up Panel, 2012
1 2 3 4 5
0 %
20 %
40 %
60 %
80 %
100 %
Firm age in years
Rating available Bad Rating Fair Rating Good Rating
Figure 3: Credit ratings and firm age in Germany
Source: KfW/ZEW Start-up Panel, 2012
ZEW policy brief series
Publisher: Centre for European Economic Research (ZEW) Mannheim,  
L 7, 1 · 68161 Mannheim · P.O. Box 10 34 43 · 68034 Mannheim · Germany · Internet: www.zew.de · www.zew.eu 
President: Prof. Dr. Dr. h.c. mult. Wolfgang Franz · Business and Administration Director: Thomas Kohl
Editorial responsibility: Prof. Dr. Dr. h.c. mult. Wolfgang Franz
Quotes from the text: Sections of the text may be quoted in the original language without explicit permission provided that the 
source is acknowledged.  
© Zentrum für Europäische Wirtschaftsforschung GmbH (ZEW), Mannheim, 2012
, Mannheim
Director of Business and Administration: Thomas Kohl
3
4 | ZEW policy brief ZEW policy brief | 4
v
not in innovative ones. Firms in low-tech industries with a bad rating are less likely to use bank financ-
ing and have more difficulties compared to firms with no, fair, or good ratings. For high-tech firms we 
found no significant effects. These findings suggest that banks take into account that external ratings 
are less informative when it comes to high-tech firms. Credit ratings are based on publicly available 
information and business-to-business (trade credit) relations. In general, credit bureaus do not use 
different rating standards for high-tech and low-tech firms. Aware of this fact, banks seem to react 
to the negative signalling of an external rating only in the case of low-tech firms.
We identified the main bank of each firm through the Creditreform database. For each of these 
banks we then used the entire Creditreform database (for start-up and established firms) to es-
tablish the size of the bank (number of firms served, weighted by labour force) and the expertise 
of the bank in the start-up’s industry (number of firms served in the same industry). Our results 
suggest that start-ups that have a relationship with a large bank are less likely to rely on bank fi-
nancing. They also report greater difficulties in getting bank credit. While the effect of bank size 
is statistically significant, its economic magnitude is relatively small: an increase of bank size by 
one standard deviation decreases the probability of using bank credit by 1.6 percentage points 
and increases the probability of reported difficulties in getting credit by 1.1 percentage points. 
By comparison, 65 per cent of the start-ups in our sample used bank financing and 38 per cent 
reported difficulties in accessing bank credit. Furthermore, our results suggest that larger exper-
tise of the bank in the firm’s industry does not significantly reduce difficulties in getting credit. 
Impact of Bank  
Size and Industry  
Expertise
Project Profile
 ͮ Martin Brown, University of St. Gallen (martin.brown@unisg.ch)
 ͮ Hans Degryse, KU Leuven, EBC – Tilburg University and CEPR (H.Degryse@uvt.nl)
 ͮ  Daniel Höwer, Centre for European Economic Research (ZEW) and University of  
Mannheim (hoewer@zew.de)
 ͮ María Fabiana Penas, Tilburg University – CentER, TILEC, and EBC (M.Penas@uvt.nl)
Daniel Höwer, Centre for European Economic Research (ZEW), L7 1, 68161 Mannheim, Germany, 
phone: +49 621 1235 187, fax +49 621 1235 170, e-mail: hoewer@zew.de 
Research was made possible through the research programme “Strengthening Efficiency and 
Competitiveness in the European Knowledge Economies” (SEEK), funded by the German state of 
Baden-Württemberg.
Brown, M., Degryse, H., Höwer, D., and M.F. Penas (2012), “How Do Banks Screen Innovative 
Firms? Evidence from Start-up Panel Data”, ZEW Discussion Paper No 12-032, Mannheim.
SEEK programme: www.seek.zew.de
Data source: www.gruendungspanel.de
Research Team
Contact
Funding
Publications
Websites


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Start-up financing : how credit ratings and bank concentration impact credit access

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