How Much Does Credit Matter for Entrepreneurial Success in the United States

A lot. Using data on startup loan applicants from a U.S. lender that employed an automated algorithm in its application review, we implement a regression discontinuity design assessing the causal impact of receiving a loan on entrepreneurial success. Obtaining a loan has a strong effect on the future financial position of startups. Startups receiving funding are dramatically more likely to survive, enjoy higher revenues and create more jobs. Loans are more consequential for survival among entrepreneurs with more education and less managerial experience. Access to credit creates a skewed firm size distribution by enabling quite small firms to succeed. We would like to thank Catherine Meyrat, Nelly Rojas-Moreno, and Duangkamol Phuengpanyalert for their guidance about institutional details. We also thank Rosy Manzanarez, Alejandra Garcia, and Siddharth Subramanian for their research support. We are grateful for comments from seminar participants at Instituto de Empresa, NYU Stern, Rutgers, UCLA and Wharton. Garmaise gratefully acknowledges support from the Harold and Pauline Price Center. Contact information: cesare.fracassi@mccombs.utexas. edu, mark.garmaise@anderson.ucla. edu, shimon.kogan@austin.utexas. edu, gnativid@stern.nyu. edu. Small entrepreneurial firms represent a strikingly large portion of the American economy. Basic indicators such as GDP growth, job creation, innovation rate, and wealth accumulation all depend to a great extent on the success of newly founded organizations constantly revitalizing U.S. markets. Given the collective size and dynamism of this sector of the economy, the role of financial institutions in funding nascent firms has become a central area of research and debate. In this paper we consider two main questions. First, to what extent do formal loans matter for entrepreneurial success in the U.S.? Second, what types of entrepreneurs experience the greatest benefits from receiving this credit? On the first issue of the importance of credit, consider a potential loan to a small firm from a given lender. It may be argued that this funding will have a large impact on the firm’s success, as loans constitute a major source of entrepreneurial financing (Robb and Robinson (2012)), and early-stage credit may enable entrepreneurial ventures to invest in value-creating opportunities and achieve necessary scale. On the other hand, there are reasons to suggest that the effect of the loan will be minimal. Specifically, there is evidence that entrepreneurs who cannot obtain bank financing are of relatively low quality (Kerr and Nanda (2009), Cetorelli (2009) and Andersen and Nielsen (2012)). In that case, good firms that are rejected by this one lender will find financing elsewhere, while poor firms that do receive a loan will be unlikely to succeed in any event. Moreover, there are indications that liquidity constraints do not matter much for entrepreneurial firm creation (Hurst and Lusardi (2004)) and some surveys suggest that small firms are unlikely to be financially constrained (Angelini and Generale (2008)). Further, there has been considerable debate on whether financial constraints matter for small-firm growth trajectories in developed economies, as financial capital may be substituted for by other available factors (e.g., Carpenter and Petersen (2002) and Beck, Demirguc-Kunt, and Maksimovic (2005)) and entrepreneurs may For example, the U.S. Census reports that there were 22.6 million nonfarm sole proprietorships and 3.1 million partnerships in 2008, together accounting for 42.4% of all business net income in that year.