Personal Guarantees, Loan Pricing, and Lending Structure in Finnish Small Business Loans

Abstract

This study analyzes the role of personal guarantees and collateral in the context of two different lending structures: one transaction and the other relationship based. The Finnish bank data, which were uniquely accessible for the study, enabled an exploration of credit files with specific details of the characteristics of the lending relationship during the period 1995–2001. According to the empirical results, the use of personal guarantees is an indication of transaction‐based lending. Personal guarantees seem to increase the loan premium in transaction‐based loans more than in relationship‐based loans. Close ties between a bank and a firm seem to be a desirable basis for small and medium‐sized enterprise bank lending.

Is Relationship Lending Still a Mixed Blessing? A Review of Advantages and Disadvantages for Lenders and Borrowers

“…A number of studies find that it impacts negatively on the cost of credit, positively on the amount of credit granted and negatively in the amount of firm guarantees or collateral, since the bank benefits from more and better information about the opaque firm and is able to better screen higher from low-risk borrowers. This is demonstrated for the USA (Petersen and Rajan, 1994;Berger and Udell, 1995;Cole 1998;Brick and Palia, 2007), Finland (Peltoniemi, 2007;Peltoniemi and Vieru, 2013), Germany (Harhoff and Körting, 1998) 4 and Italy (Bartoli et al, 2013). Moreover, firms engaging in a long relationship with the same bank experience lower probability of default on previous loans (Fiordelisi et al, 2013).…”

Business advice and lending in small firms

“…However, through the use of different lending mechanisms, evidence suggests that banks and small firms manage to avoid credit rationing on a general basis (Berger & Black 2011;Kremp & Sevestre 2013;Parker 2002). The provision of collateral, the imposition of shorter maturity terms, the insertion of covenants, and the setting of varying prices gives the tool to banks and entrepreneurs to reach terms of contract that are acceptable to both sides (Berger & Udell 2003;Peltoniemi & Vieru 2013).…”

'Keeping It Personal' or 'Getting Real'? On the Drivers and Effectiveness of Personal versus Real Loan Guarantees

“…Even though personal and real guarantees have very different properties, only a handful of recent papers treat them separately. 4 Brick and Palia (2007), Peltoniemi and Vieru (2013), and Calcagnini, Farabullini and Giombini (2014) for example explore the differential effects of personal versus real collateral on the loan rate, while Pozzolo (2004), Voordeckers and Steijvers (2006), and Ono and Uesugi (2009) − like our paper − study their differential determinants. The first paper (among these latter three) studies 52,000 bank credit lines that were granted in Italy between 1992 and 1996, and finds differences along relationship characteristics and firm risk in collateralization outcomes.…”