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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.