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Terms Of Lending For Small Business Lines Of Credit: The Role Of Loan Guarantees

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  • Raymond Posey
  • Alan K. Reichert

Abstract

This study examines the role of loan guarantees in lines of credit granted to small businesses. Since there is evidence of simultaneity among lending terms, two-stage instrumental variable procedures are used to obtain consistent parameter estimates. The findings suggest the presence of a loan guarantee is associated with lower interest rates and smaller lines of credit and that loan guarantees and collateral are to some extent substitutes in that loans guarantees are a close substitute for collateral but collateral does not always serve as a close substitute for loan guarantees. Furthermore, firms with longer banking relationships and/or fewer banking relationships are less likely to have loan guarantees.

Suggested Citation

  • Raymond Posey & Alan K. Reichert, 2011. "Terms Of Lending For Small Business Lines Of Credit: The Role Of Loan Guarantees," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 5(1), pages 91-102.
    • Handle: RePEc:ibf:ijbfre:v:5:y:2011:i:1:p:91-102
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    References listed on IDEAS

    as
    1. Glennon, Dennis & Nigro, Peter, 2005. "Measuring the Default Risk of Small Business Loans: A Survival Analysis Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 923-947, October.
    2. Riding, Allan L. & HainesJR., George, 2001. "Loan guarantees: Costs of default and benefits to small firms," Journal of Business Venturing, Elsevier, vol. 16(6), pages 595-612, November.
    3. Chakraborty, Atreya & Hu, Charles X., 2006. "Lending relationships in line-of-credit and nonline-of-credit loans: Evidence from collateral use in small business," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 86-107, January.
    4. Cowling, Marc & Mitchell, Peter, 2003. "Is the Small Firms Loan Guarantee Scheme Hazardous for Banks or Helpful to Small Business?," Small Business Economics, Springer, vol. 21(1), pages 63-71, August.
    5. Brick, Ivan E. & Palia, Darius, 2007. "Evidence of jointness in the terms of relationship lending," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 452-476, July.
    6. Taeyoung Doh & Keunkwan Ryu, 2004. "Analysis of loan guarantees among the Korean Chaebol affiliates," International Economic Journal, Taylor & Francis Journals, vol. 18(2), pages 161-178.
    7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    8. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
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    Citations

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    Cited by:

    1. Konstantinos Drakos, 2013. "Bank loan terms and conditions for Eurozone SMEs," Small Business Economics, Springer, vol. 41(3), pages 717-732, October.
    2. Moro, Andrea & Maresch, Daniela & Fink, Matthias & Ferrando, Annalisa & Piga, Claudio, 2020. "Spillover effects of government initiatives fostering entrepreneurship on the access to bank credit for entrepreneurial firms in Europe," Journal of Corporate Finance, Elsevier, vol. 62(C).
    3. Song, Zhuo-lin & Zhang, Xiao-mei, 2018. "Lending technology and credit risk under different types of loans to SMEs: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 43-69.
    4. repec:aly:journl:201818 is not listed on IDEAS

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    More about this item

    Keywords

    Term of lending; bank relationships; line of credit;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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