Debt-Based Financing

After entrepreneurs have exhausted their own funds to start their venture, debt is the most widely used form of external financing by new firms. As such, debt is an important source of external financing for funding working capital and possibly growth in new firms. There are multiple theories on how firms will use debt to finance their operations, along with multiple sources available to new firms. Banks are the largest source of debt for new firms, with other debt sources also available. Creditors utilize various means to identify the creditworthiness of new firms, and new firms use various methods to try to signal to creditors that they are worthy. However, there is still a possibility that creditors ration credit to viable new ventures. As a ...