Intangible Management Capital Borrowing Barrier
Observational StudyReview
Financial institutions willingly fund physical assets that can be repossessed as collateral, but refuse to lend for intangible management upgrades and consulting due to lack of physical collateral and owner/bank unawareness of management returns [6, 12].
Picture this
A bank readily lends money to buy a delivery truck because the bank can repossess the truck if loan payments stop, but refuses to lend money to train drivers on faster route planning because acquired knowledge cannot be repossessed if the business fails.
What the evidence says
Large manufacturing firms easily executed physical equipment investments of $1,000,000 or more without credit constraints, yet could not secure debt financing for managerial consulting because organizational practices lack seizeable collateral [6].
- Who was studied
- Large Indian textile manufacturing firms with median capital assets of $13.3 million alongside cross-country enterprise data [6, 13].
- How
- Empirical research synthesis combining randomized grant evaluations, directed credit policy changes, and field observations [6, 14].
What to do
Reallocate internal operating cash flows toward managerial training and consulting rather than relying on commercial bank loans that require physical collateral.
From the source
"First, while firms might easily obtain financing for physical capital investments, it might be harder to borrow to hire consultants or to finance business education for managers. One reason for this is that physical capital is collateral, which can be seized in case of default, whereas better management and organizational practices cannot." [6]
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