It is well established that financial development is necessary for the efficient allocation of capital and firm growth, yet firm-level surveys have repeatedly found access to finance to be among the biggest hurdles to starting and growing a new business. For instance, in the World Bank’s Enterprise Surveys standardized dataset for 2006-2009, 31% of firm owners around the world report access to finance as a major constraint to current operations of the firm, while this figure is 40% for firms under three years of age.
In a recent paper with Larry Chavis and Inessa Love we address two types of questions: (1) What is the relationship between firm age and sources of external financing? and (2) Is there a differential impact of the business environment on access to financing by young versus old firms?
To summarize, we find systematic differences in the use of different financing sources for new and older firms. We find that in all countries younger firms rely less on bank financing and more on informal financing. However, we also find that young firms have relatively better access to bank finance in countries with stronger rule of law and better credit information and that the reliance of young firms on informal finance decreases with the availability of credit information.