The Capital Structure of Business Start-Ups. Policy Implications

N. Huyghebaert

Review of Business and Economic Literature, 2003, vol. XLVIII, issue 1, 23-46

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.

Date: 2003-01
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