Accrual accounting and access to external funds: Evidence from small businesses

Abstract

This study explores how the use of accrual accounting, as opposed to cash accounting, is related to small businesses' access to external funds and the type of borrowing relationships they have. The findings show that the use of accrual accounting is associated with better access to lines of credit and trade credit, which are important sources of external financing for small businesses. The use of accrual accounting is also positively associated with larger borrowing amounts, more favorable borrowing terms, the establishment of more credit relationships, and with more distant financial institutions. Likewise, accrual accounting is associated with shorter borrowing relationships and less reliance on personal contact with financial institutions. Overall, this study demonstrates a significant association between the use of accrual accounting and improved access to external finance for small businesses, suggesting that the informational limitations of cash accounting may be related to greater constraints in accessing external funding.