Based on a dataset with 1,417 family and 1,195 non-family businesses in Germany, we find that family businesses rely more heavily than other enterprises on short term credit in order to finance long term investment and innovation projects. We investigate the reasons underlying these differences in the financing behaviour of family businesses and other businesses. Do family businesses tend to use shorter-term - on average more expensive - sources of financing because they face more financial restrictions than comparable non-family enterprises? Or do they have other motives for their ostensibly irrational financing choices, such as a strong desire to remain independent? We approach answering this research question by simultaneously estimating the determinants of financing behaviour and creditworthiness. For both of these facets, we compare family businesses with non-family businesses that have otherwise the same characteristics. Our econometric results show that creditworthiness for family-driven companies tends to be higher than for non-family driven companies. In particular, large family businesses exhibit a higher creditworthiness and use short-term credit more frequently. This goes against the notion that greater use of short-term sources of credit by family enterprises is an indicator for financing restrictions. As a result, we discuss two possible explanations for our observation that family enterprises make greater use of overdrafts and revolving credit: One reason might be that family businesses are offered lines of credit at advantageous rates. These forms of credit therefore do not represent as much of a cost disadvantage as they would for other, less creditworthy businesses. While it is not possible to verify this explanation due to a lack of enterprisespecific data on the cost of the credit lines granted, it seems unlikely that the observed differences in financing behaviour can be explained purely on the basis of interest rate effects. In particular, higher creditworthiness would lower interest rates for all maturities and not necessarily lead to a reduction in the relative costs of short term credit. Another reason might be that family businesses are particularly concerned about staying independent from external capital providers. For this reason, they prefer the less complicated option of an overdraft or revolving credit to a loan dedicated to a specific investment. There is some additional evidence in the Mannheim Innovation Panel to suggest that this might be the relevant explanation in this case. In particular, large family businesses stated that a high level of dependence from a lender would be a reason to decide against borrowing. Overall, our results seem to confirm the frequently stated assumption that independence from external capital providers is of central importance for family businesses. Based on the frequency of use of various sources of finance, our data provide clear evidence that family businesses are prepared to accept higher financing costs in order to preserve their financial independence and flexibility. Surprisingly, this particularly applies to family businesses that are larger and generally more creditworthy.

Keywords

corporate financing, innovation, family businesses, financing restrictions