Debt Financing and Firm Growth: European Evidence on Startups

This paper investigates the bank financing policy of new small and medium-sized enterprises (SMEs), its evolution and its relevance during early growth stages over their first 10 years. We use a large European panel dataset on early-stage SMEs founded in 2007–2015. The study provides useful advice for practitioners and managers regarding the controversial relationship between debt financing and the life cycle. First, our results reveal the dynamics of firms’ financial behavior relative to age. The relation between debt financing and entrepreneurial firms’ growth is remarkably unstable over time. Debt is positively related to firm startup stage growth and decreases over time. Second, debt financing is significantly related to firm productivity over time and the probability of bankruptcy. We perform additional analyses to expand our baseline results and suggest future research directions.