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The Pricing of Small Business Loans

Author

Listed:
  • John K. Ford

    (University of Maine)

Abstract

A major difficulty in determining the appropriate risk premium for lending to small businesses is the lack of market value information. This paper develops a mean-variance model that uses available failure rate data to establish a benchmark risk premium for lending to firms in specific industries. This model incorporates the benefits of diversifying across firms and industries. This paper also presents evidence that a random walk model provides the best forecast of future failure rates.

Suggested Citation

  • John K. Ford, 1994. "The Pricing of Small Business Loans," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 3(3), pages 249-260, Fall.
    • Handle: RePEc:pep:journl:v:3:y:1994:i:3:p:249-260
    as

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    References listed on IDEAS

    as
    1. Koehn, Michael & Santomero, Anthony M, 1980. "Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-1244, December.
    2. Joy, O. Maurice & Tollefson, John O., 1975. "On the Financial Applications of Discriminant Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(5), pages 723-739, December.
    3. Pyle, David H, 1971. "On the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 26(3), pages 737-747, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Small Business; Loan Pricing; Interest rates; Borrowing;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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