Business collateral and personal commitments in SME lending

Abstract

Using a database of SME credit approvals from a large Belgian bank, this paper extends the empirical evidence on the determinants of collateral by examining the determinants of business collateral simultaneously with the determinants of personal collateral/commitments. Our results suggest that firm and relationship characteristics seem to be more important determinants of collateral/commitment protection than loan and lender characteristics. Family firms are more likely to offer a higher degree of collateral/commitment protection while introducing competition between banks decreases this likelihood. The collateral requirement decreases in the length of the bank-borrower relationship. Furthermore, trade credit seems to have a signalling effect. The 'lazy banks hypothesis' was not supported. Our results suggest that beside risk arguments, also commercial arguments help explain the pledging of collateral. Using a continuation-ratio logit model, we discover several differences in the determinants of the collateralisation decision and the determinants of the type of collateral/commitments. JEL classification: M13; G21; G30; G32; C35Keywords: SME lending, business collateral, personal collateral, personal guarantees. Business collateral and personal commitments in SME lending. AbstractUsing a database of SME credit approvals from a large Belgian bank, this paper extends the empirical evidence on the determinants of collateral by examining the determinants of business collateral simultaneously with the determinants of personal collateral/commitments. Our results suggest that firm and relationship characteristics seem to be more important determinants of collateral/commitment protection than loan and lender characteristics. Family firms are more likely to offer a higher degree of collateral/commitment protection while introducing competition between banks decreases this likelihood. The collateral requirement decreases in the length of the bank-borrower relationship. Furthermore, trade credit seems to have a signalling effect. The 'lazy banks hypothesis' was not supported. Our results suggest that beside risk arguments, also commercial arguments help explain the pledging of collateral. Using a continuation-ratio logit model, we discover several differences in the determinants of the collateralisation decision and the determinants of the type of collateral/commitments. JEL classification: M13; G21; G30; G32; C35

Collateral Requirements for Sme Loans: Empirical Evidence From the Visegrad Countries

“…Long-term loans may also create moral hazard problems, provoking banks to ask for collateral (Duarte et al 2016). Voordeckers and Steijvers (2006) find that long-term loans are collateralized with fixed assets in the Belgian market. Thus, longer maturity signals higher risk for banks and requires collateral safety to assure that the borrowers will not engage in any activities that is contradictory with the interest of the banks.…”

“…Hence, it is important for banks to secure loans by asking for collateral from borrowers (Degryse, Van Cayseele 2000). Voordeckers and Steijvers (2006) also find that large loans are collateralized, whereas Hernandez-Canovas and Martinez-Solano (2006) show that small loans are usually provided based on the relationship between the bank and the borrower.…”

“…Longterm loans may induce moral hazards and adverse selection problems due to the longer loan period and, hence, loan maturity is positively correlated to collateral (Harhoff, Korting 1998;Voordeckers, Steijvers 2006;Hainz et al 2013;Duarte et al 2017). Additionally, longer periods may induce borrowers to shift from less risky to high-risk projects (Jensen, Meckling 1976).…”

“…Berlin and Butler (2002) argue that as competition in the market intensifies, lenders need to relax lending terms, for example, lower expected collateral ratios due to less market power. Voordeckers and Steijvers (2006) find that bank competition reduces collateral requirements because borrowers can switch to other banks to obtain loans with better lending terms. Conversely, Jimenez et al (2009) find that in a competitive market, banks can increase collateral ratios in an attempt to increase their superiority over competitors in a loan contract.…”

Predicting new venture survival and growth: Does the fog lift?

“…Second, in an established firm the accumulated assets constitute a 'track-record' which can help internal and external parties assess future performance, whereas no such record exists for a new venture. This is particularly problematic for external suppliers of finance-banks, trade creditors-who then seek 'signals' of credibility, such as collateral (Voordeckers and Steijvers 2006).…”