Economics in a picture
Start-ups with long term bank financing have a higher survival probability
Newly created firms are an important source of innovation and creation of new products and play a critical role in job creation and access to new markets. Despite the large number of firms that starts activity every year, new firms fail at a significant rate in their first years of life. It is broadly accepted that the economic and financial conditions faced by a start-up at inception can have long-lasting effects in their life-cycle performance, namely because they can affect their investment decisions and their stock of human capital. Access to long term bank funding may be especially important for start-ups because uncertainty about future funding will likely hamper firms’ investment decisions and reduce their ability to weather negative shocks.
In Portugal, in the period from 2005 to 2012, firms with long term bank financing failed at a lower rate than those of the same age that do not have this funding source. This difference in survival probabilities increases as firms age. Approximately 24% of start-ups with no long-term bank debt do not survive for more than three years and more than 53% of them fail before their sixth year of life. Survival rates of start-ups with long-term bank funding are higher, with approximately 54% of them surviving for at least eight years.
For more details see Luísa Farinha, Sónia Félix, and João A. C. Santos (2019) “Bank funding and the survival of start-ups”, Banco de Portugal Working Papers 2019/19.
Prepared by Luísa Farinha and Sónia Félix. The analyses, opinions, and findings expressed above are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.
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