VoxEU Column Competition Policy International Finance Productivity and Innovation

Financing start-ups: The impact of credit scoring and bank concentration

Might bank consolidation and the increasing reliance on external credit ratings harm access to credit for start-up firms, especially those in high-tech industries? This column examines how the availability of credit for start-ups in Germany is related to their external credit rating as well as the size and expertise of their main bank.

Newly created firms and in particular high-tech start-ups are the engines of growth in many countries. Empirical evidence from the US and Europe shows that banks are the most important source of finance to new firms (Robb and Robinson 2010 for the US; Huyghebaert et al. 2000 and Colombo and Grili 2007 for Europe). However, start-up firms – low-tech and high-tech – often face difficulties in raising the required funds to implement their ideas. Some argue that banks are less willing to provide funds to start-ups, as these firms lack collateral and are more opaque (Hall 2009). Asymmetric information regarding creditworthiness and a lack of tangible capital may arguably lead to stronger credit constraints for high-tech start-ups as opposed to low-tech start-ups.

the last two decades, we observe two developments in the banking industry which impact on the way banks assess their prospective clients and may especially affect access to credit for start-up firms.

  • First, banks increasingly rely on external credit reports when judging the creditworthiness of their prospective borrowers. Empirical evidence suggests that information sharing through credit bureaus enhances credit availability, in particular for small businesses. However, it is unclear to what extent the increased reliance on credit reports by banks may benefit start-up firms, and especially those in high-tech industries. There is scarce evidence to date on how credit information sharing affects credit availability for start-up firms. This is, however, an important issue. If banks rely strongly on credit history information for their credit assessment, this may have a negative impact on those prospective borrowers which do not yet have a (bank) credit history. This information may be particularly important for a bank’s credit assessment when it deals with innovative start-ups for which information asymmetries are particularly strong.
  • Second, the banking industry has experienced a strong consolidation process, leading to fewer banks which are now more diversified with respect to the geographical and industry composition of their credit portfolio. As an example, in Germany the number of banks reduced by 53% between 1990 and 2010. As larger banks are typically more hierarchal, soft information about the creditworthiness of borrowers may become more difficult to transport within the organisation. This may reduce the ability and willingness of banks to lend to start-ups, and especially those in high-tech industries, as their assessment is more dependent on such information (Stein 2002). On the other hand, larger banks may build industry expertise in a broader range of industries, for example by employing loan officers that specialise on new, innovative firms.
The data

In a new ZEW working paper (Brown et al. 2012), we examine the impact of external credit ratings, bank size and bank expertise on the access to bank credit for start-up firms in Germany. Our analysis is based on the KfW/ZEW Start-up Panel that covers 9,715 firms founded in the years 2005-9. Within computer-assisted telephone interviews, start-up entrepreneurs provided information on investments and financing sources. We consider three firm-level measures of credit availability: the incidence of bank credit (26% in our sample), the share of total firm financing sourced from banks (sample mean = 9%), and whether or not the firm reports difficulties in accessing bank credit (15% in our sample). It is noteworthy that a large share of the start-ups in our sample report do not require external finance. Among those that do require external finance, 65% use bank credit, the mean share of bank credit to total financing is 22%, and 35% of firms report difficulties in getting bank finance. Start-up firms in high-tech industries are more likely to report difficulties in getting bank credit (41%) than those in low-tech industries (36%). Information from the Start-up Panel is merged with information on each firm’s credit rating and its main bank relation, both provided by Creditreform, Germany’s largest credit bureau.

The impact of external credit ratings

We first look at how the first announcement of a credit rating for start-up firms affects their access to bank finance. Here we make use of the rating policy by Creditreform to wait at least a year before publishing a rating on a newly founded firm. While only 28% of start-ups have a Creditreform rating in their second year of operation, the share of firms with a rating is 95% by the fourth/fifth year of existence.

Our results show that when an external credit rating becomes available, it only affects a firms’ access to credit if the rating contains negative information, i.e. when the rating is bad. Moreover, banks react to bad ratings when lending in traditional industries but not in innovative industries. Firms in low-tech industries with a bad rating are less likely to use bank finance and have more difficulties compared to firms with no, fair, or good ratings. For high-tech firms we do not find significant effects.

These findings suggest that banks take into account that external ratings are less informative for high-tech firms. External 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 compared to low-tech firms. Aware of this, banks seem to react to bad signals by an external rating only for low-tech firms.

The impact of bank size and expertise

For each firm, we identify the main bank relationship through the Creditreform database. For each of these banks we then use the entire Creditreform database (for start-up and established firms) to establish 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 use bank finance and report more 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 bank by 1.6 percentage points and increases the probability of reporting difficulties in getting credit by 1.1 percentage points. By comparison, 65% of the start-ups in our sample use bank finance and 38% report difficulties in accessing bank credit. Our results further suggest that larger expertise of the bank in the firm’s industry does not seem to significantly reduce difficulties in getting credit.

Policy conclusions

Our results have important policy implications. Policymakers might be concerned that the increasing reliance on external credit ratings by banks may increase credit constraints for start-up firms, especially those in high-tech industries. We find that this concern is unwarranted as banks seem to rely less on external ratings when lending to high-tech firms as opposed to low-tech firms. Also, the trend towards more concentration in the banking sector may have detrimental impacts on credit availability for innovative start-up firms. We find that start-ups that deal with larger banks indeed face more difficulties in obtaining bank finance. However, this effect is quite small and it applies tor all types of start-ups – low-tech and high-tech – suggesting that a differential policy intervention for innovative firms is unwarranted.


Brown, M, H Degryse, D Höwer, and MF Penas (2012), “How do Banks Screen Innovative Firms? Evidence from Start-up Panel Data”, ZEW discussion paper.

Colombo, M and L Grilli (2007), “Funding Gaps? Access To Bank Loans By High-Tech Start-Ups”, Small Business Economics, 29:25-46.

Hall, BH (2009), "The financing of innovative firms", European Investment Bank Papers, 14(2):8-28.

Huyghebaert, N, A Gaeremynck, F Roodhooft, and LM Van de Gucht (2000), “New Firm Survival: The Effects of Start-Up Characteristics”, Journal of Business Finance & Accounting, 27:627.

Robb, A, and D Robinson (2011), "The Capital Structure Decisions of Startup Firms", Review of Financial Studies, forthcoming.

Stein, JC (2002), “Information Production and Capital Allocation: Decentralized versus Hierarchical Firms”, Journal of Finance, 57:1891-1921.

2,835 Reads