This paper investigates the effect of organizational capital, typified by various management practices within a firm, on the cost of external debt financing. Using a sample of medium-sized manufacturing firms in the US, we find that better management practices enhance a firm’s external financing capacity by lowering the firm’s cost of bank loans. We do not find any evidence that the lower loan cost of a high-quality-management firm is associated with more restrictive non-price contract terms such as greater collateral requirements and stricter covenants. These results suggest that banks explicitly take into account the risk arising from poor management practices when pricing and designing debt contracts.

Using comprehensive bank-loan contract information, we show that the power of a firm relative to its suppliers eases its terms of bank financing, specifically through lower loan prices and less restrictive non-price contract terms. Our results are robust to controlling for product-market competition. Supply chain power enables the firm to achieve a greater level of control over its inventory, constituting a significant portion of the reduction in its overall loan cost. We argue that it is important to consider supply-chain related issues when analyzing the external-financing capacity of firms.