Dwyer & Lynn (1989) found that small firms use significantly more debt, particularly short-term debt, than large firms.
They concluded that small firms rely more heavily on bank financing to avoid the relatively high transaction costs.
associated with publicly issued debt and equity. Their findings are confirmed in a subsequent studies by Carter & Van.
Auken (1990), Osteryoung et al. (1992), and Van Auken et al. (1995).
For many privately-held small businesses, the decision to finance with debt rather than equity may be driven at least as.
much by necessity as by choice, because small firms do not have the same access to capital that larger public firms do.
They are unable to issue publicly-held debt or equity because of their small size and the high cost of issuing securities.
As a result, small firms tend to be heavily reliant on debt in the form of bank financing and trade credit (Scherr et al.,.
1993; Petersen & Rajan, 1994; Cole & Wolken, 1995, Ibid., 1996).
Although prior research documents small business reliance on bank debt as a source of financing, access to debt capital.
is, paradoxically, a frequently cited difficulty for small firms. Small businesses are often relatively new and lack a.
consistent track record of profitability that would demonstrate the capability to repay a loan. In addition, many small.
businesses are in service industries and lack assets that could be used as collateral. Asymmetric or incomplete.
information between the borrower and the lender also represents a potential financing problem for small privately-held.
firms (Ang, 1992; Berger & Udell, 1995; Ennew & Binks, 1994; Petersen & Rajan, 1994; Weinberg, 1994). In the.
absence of sufficient information, the typical response of a banker is to deny the loan. As a further consideration, small.
businesses are more prone to financial distress and failure. Failure rates in excess of 50 percent are commonly cited.
(Bates & Nucci, 1989; Cochran, 1981).
