Do firms get the financing they want? Measuring credit rationing experienced by small businesses in the US

This paper measures the extent to which small businesses in the United States in the late 1980s were able to access the external credit finance they desired. We argue that a comprehensive definition of credit rationing must account for both (a) creditworthy firms that apply for and are denied financing, and (b) creditworthy firms that decide not to apply for desired external financing, given expectations about how long it may take to obtain financing and the evolution of investment opportunities. Data from a national survey of small businesses shows that only 2.14 percent of firms did not obtain the funding for which they applied in 1987-88. Another 2.17 percent may have faced some short-run constraints on investment: they were initially denied by lenders but received the credit for which they applied by the end of the sample period. Finally, an additional 4.22 percent of firms are estimated to have been discouraged from applying because of expected denial. Constrained firms are smaller, younger, and more likely to be owned by their founders than those firms that successfully applied for external finance. The total number of credit constrained firms seems quite small, particularly because we cannot distinguish empirically between creditworthy and noncreditworthy firms. Thus the extent of true credit rationing appears quite limited.