Keywords: intellectual capital, business angels, relationship lending, transaction lending, financial intermediaries, banks, venture capital, small firms, knowledge-intensive firms, entrepreneurial firms, financing decisions, small and medium-sized enterprises, SMEs, entrepreneurial financing, entrepreneurship
Contracting for finances by entrepreneurial firms: the use of IC information by credit analysts and business angels
The primary purpose of this paper is to examine whether financial intermediaries such as banks and venture capitalists use information on intellectual capital (IC) in their financing decisions related to small, knowledge-intensive, entrepreneurial firms. The secondary purpose is to establish how these firms use this information in their financing decisions. We use survey data (in the case of banks) and structured interviews (in the case of venture capital) to document differences in the use of information about IC by two types of financial intermediaries. We established that transaction-based lending, as conducted by banks, is characterised by the use of traditional financial indicators with limited use of IC information. Relationship-based lending, as in the case of 'business angels', relies mainly on IC information, especially related to the human capital of managers, with some supplementary use of financial indicators. This paper contributes to the literature on IC by examining the extent to which banks and venture capitalists use information on immaterial assets by documenting the differences and providing recommendations for improvements in the assessment of the creditworthiness of small and medium enterprises (SMEs).