Using a novel dataset from Tomorrow and other limited liability firms in Sweden, Li (2016) investigates what motivates firms to seek online crowdfunding. Firms that borrow from “the crowd” are usually small private businesses that are dependent on bank financing. The paper explored the determinants of firms to borrow from the crowdlending market by comparing the ex-ante characteristics of those firms with other private limited liability firms that borrow from banks.
The results show that firms borrowing from the crowd have higher growth rates, but lack both internal funds and sufficient pledgeable assets as collateral to receive external credit, compared with firms that borrow from banks. Therefore, crowdlending provides an alternative financing source for credit-constrained small businesses, especially those that require small-sized loans. Also, the local bankruptcy rate and local criminal activity affect the probability that a firm will turn to the new online credit market. Further evidence shows the determinants of commercial loan costs in the crowdlending market and interest rates are primarily determined by credit and financial information of firms, while non-standard information, such as campaign representative profile, has little impact on pricing determination.
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