The current credit rationing strongly influences the viability of SMEs innovation projects. In this context, the practice of screening borrowers by project success probability has become a paramount consideration for both lenders and firms. The aim of this paper is to test the screening role of loan contracts that consider collateral-interest margins simultaneously.
This paper presents an empirical analysis that uses a unique data set composed of 323 bank loans granted by 28 banks to SMEs backed by a Spanish Mutual Guarantee Institution.
The results show that appropriate combinations of collateral and interest rates can distinguish between borrowers with different project success probability: low success probability borrowers finance its projects without collateral and with high interest rates, whereas high success probability borrowers accept loans with real estate collateral and low interest rates.
This screening mechanism reduces credit rationing, thus increasing good projects' access to credit.
This study provides the first empirical evidence on the effectiveness of collateral-interest pairs as a self-selection mechanism.
Erratum - It has been brought to the attention of Emerald Group Publishing that the article “Financing successful small business projects” authored by Irene Comeig, Esther B. Del Brio, Matilde O. Fernandez-Blanco, published in Management Decision Vol. 52 No. 2 pp. 365-377 contains an error in the DOI (Digital Object Identifier) number. This was due to an error in the production process.
The DOI number on this article was incorrectly published as 10.1108/MD-08-2012-0582. The correct DOI number is 10.1108/MD-01-2012-0051.
Emerald sincerely apologises for this error. The article has now been corrected online.
The authors would like to give thanks for information provided by the SGR Comunidad Valenciana and the valuable comments received to previous versions of this paper from Javier Perote, Rafael Roa, and the participants at the Academy of Entrepreneurial Finance Conference (LA, USA). Financial support from the Spanish Ministry MAEC-AECID and the Generalitat Valenciana BEST/2009/224 and GV/2012/047 project is gratefully acknowledged by Irene Comeig. Esther Del Brio thanks Junta Castilla y Leon (Excellence in Research Group G144 and Project SA382A11) and the Spanish DGI (ECO2010-20741) for funding, and Matilde O. Fernandez-Blanco gratefully acknowledges financial support under project ECO 2008-02846.
Comeig, I., B. Del Brio, E. and O. Fernandez-Blanco, M. (2014), "Financing successful small business projects", Management Decision, Vol. 52 No. 2, pp. 365-377. https://doi.org/10.1108/MD-01-2012-0051Download as .RIS
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