Family Businesses are Willing to Pay for Their Independence

Businesses that are at least 50 per cent family-owned rely more heavily than other enterprises on short-term credit in order to finance long-term investment and innovation projects. This gives them more flexibility and helps staying independent from external capital providers. In order to preserve their financial independence, family businesses are prepared to pay higher interest rates of short-term credits. These are the findings of a study conducted by the Centre for European Economic Research (ZEW) in Mannheim, which compared the financing behaviour of 1,417 family businesses and 1,195 non-family businesses in Germany.

The analysis, which is based on data from the Mannheim Innovation Panel 2007 and information provided by the credit agency Creditreform, shows significant differences in the financing behaviour of family businesses and other businesses. For example, 30 per cent of family businesses use overdrafts to finance investment, while only 19 per cent of non-family businesses do so. Furthermore, around 24 per cent of family businesses and only 14 per cent of other businesses use forms of short-term credit in order to finance innovation.

In addition, the ZEW study shows that especially large family businesses with more than 100 employees use short-term credit more frequently than non-family businesses that otherwise have similar characteristics. At the same time, these companies exhibit a higher creditworthiness than non-family driven companies. Therefore, the greater demand of short-term sources of credit by family enterprises is not due to the fact that they face financing restrictions. Instead, the reason why family businesses prefer short-term and flexible credits seems to be that they wish to stay more independent from external capital providers. In particular large family businesses stated that a high level of dependence from a lender would be a reason to decide against additional borrowing from the same lender.

For further information please contact

Dr. Peter Westerheide, Phone +49 621/1235-146, E-mail westerheide@zew.de