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The Capital Structure of Business Start-Ups. Policy Implications

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  • N. Huyghebaert

Abstract

In this article, I discuss policy implications based on a study of the capital structure of business start-ups. Using a sample of 328 newly founded enterprises in Belgian manufacturing, it turned out that venture capital is barely used as a source of financing at the time of start-up. Also, banks finance a lower fraction of debt for firms that face potentially large adverse selection and moral hazard problems. To remedy their shortage of bank credit, start-up firms use leasing and vendor financing, but have lower leverage. These results therefore suggest that newly founded enterprises may face significant financial constraints at start-up, which could contribute to their subsequent failure. As a result, I plead for policy measures that stimulate venture capital financing for smaller scale and non-high tech projects and that encourage information production by banks. While having their own merits, current government measures towards start-ups, which largely consist of providing and guaranteeing loans, do not actually meet these requirements.

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  • N. Huyghebaert, 2003. "The Capital Structure of Business Start-Ups. Policy Implications," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(1), pages 23-46.
    • Handle: RePEc:ete:revbec:20030102
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