Financing Problems for Start-ups - Start-up Financing: How Credit Ratings and Bank Concentration Impact Credit Access

The Basel II Accord implemented a tighter regulation of the banking sector. The importance of external credit scoring conducted by rating agencies has thus grown significantly for banks providing business loans. Especially innovative, not yet established companies without a convincing credit history often face substantial difficulties accessing credit. There is no evidence, however, that this is due to unfavourable or missing ratings. A study conducted by the Centre for European Economic Research (ZEW) shows that negative ratings are barriers to companies’ access to credit. Young innovative firms, however, are significantly less impacted by this effect.

Start-ups in Germany often times complain about significant difficulties to acquire bank credits, even if those credits are considered the most important source for external capital for financing innovation projects and expansion measures. This is problematical, since newly founded young companies, especially in the high-tech sector, make a significant contribution to the international competitiveness of the German economy and create new jobs.

All the more interesting is the observation of the ZEW study that ratings play a less important role for the provision of credits to newly founded companies in the high-tech sector than they do for companies of the traditional industries. Therefore, a high-tech company is affected less by an unfavourable external credit assessment than companies in traditional economic sectors. Banks seem to attribute less significance to external ratings of high-tech companies and base their decision on other, soft factors. If there is no external rating at all, banks treat the company as if it would have a good or excellent rating.

The analysis regarding the provision of credits to start-ups, which was conducted within the framework of the SEEK programme at ZEW (further information at the bottom of the press release), is based on the KfW/ZEW Start-Up Panel with data on more than 9,700 companies founded between 2005 and 2009. This data has been combined with information provided by the credit reporting agency Creditreform on ratings of the companies and their house bank. Thereby it was shown, that altogether 26 per cent of the companies in the panel require bank credits. This corresponds to a share of 65 per cent of all companies that drew on external financing. In that context, some 41 per cent of the young high-tech companies and about 36 per cent of the young companies from traditional sectors reported on problems with the provision of credits.

The ZEW analysis also shows, that the larger the bank the more cautious it is with the provision of credits to young companies. This could explain why young companies in the high-tech sector as well as in traditional sectors, whose house bank is a large bank, make use of bank credits less frequently and more often report on difficulties to acquire bank credits. Meanwhile, the effect of the size of the bank on the availability of credits is however rather small. Worries that the bank consolidation – between 1990 and 2010 alone the number of banks in Germany decreased by 53 per cent – would complicate young companies’ access to credits, therefore, is ungrounded.

For further information please contact

Daniel Höwer, Phone +49 621/1235-187, E-mail hoewer@zew.de