The Valuation and Cost of Credit Insurance Schemes for SMEs: The Role of the Loan Guarantee Associations

Abstract

David Camino And Clara Cardone are both associate professors of Accounting and financeat the Department of Business economics at Universidad Carlos III de Madrid, Spain, Small and Medium enterprise (SEMs) have important limitations from the finanicial viewpoint. Their reduced capability to generate resources (Self financing) and their high finanical cost as compared with the profitability of investment, makes them highly dependent on short-term highly dependednt on short-term bank finanicing, among the different mechanisms used to solve these financial problems are credit guarantee schems such as Loan Guarantee Association (LGA). These (mutual or government granted) credit insurance system were set up to ease the acces of SMEs to the credit market by convering part of the loss incureed when borrowers deefaulted on lons. In spite of some legal differencde, LGAs in most European Union countries function in fairly similary ways, thereofre making it esier to compare their operationsl cost and impact on business. This study provides a model for the valuation of cost and implicit benefits associated with loan guarantee programmes. Empirical results indicate that the use of LGAs is likely to differ among SMEs depending on company size and ebt fincial cost. The relativel high cost of the loan guarantee is not always fully compensated with a similar reduction in the interest rates of the financing hindering the full development of the schemes.

Small–Scale Entrepreneurship and Access to Capital in Peripheral Locations: An Empirical Analysis

“…The assessment of this activity has been equally varied. Much effort has gone into estimating the gross impacts of programs, whether in terms of cost of capital (Howland 1990, Camino andCardone 1999), utilization rates (Cowling and Clay 1994), new firm formation and survival (Harrison and Mason 1986;Hart and Scott 1994;Mensah 1996), employment impacts (Howland 1990;Monk 1991), or new taxes (Chrisman and Katrishen 1994).…”

An analysis of budgetary goals impacting organizational performance

“…Camino and Cardone (1999) explain that many organizations fail to prepare detailed working papers attached to the budget plan and projected cash flow statement, when they apply for loans. Thus, organizations face difficulties in obtaining funds from financial institutions and government (Yunos, Zubaidah and Smith, 2012).…”

Operational drivers affecting credit risk of mutual guarantee institutions

“…Mutual guarantees are outside collateral, which are not directly provided by the borrower, and accordingly, subject to a greater moral hazard effect, which is further intensified when public funds supplement the guarantee (Jimenez and Saurina, 2004;Mistrulli and Vacca, 2011;Caselli et al, 2013). Moreover, because the cost of the guarantee provided by an MGI is only partially offset by a decrease in the interest rate paid on the loan (Camino and Cardone, 1999), the firms that use MGIs do not represent a random sample of SMEs, but a subset characterised by a higher risk profile compared with the overall average. Only firms that would otherwise have their loan application rejected from banks are apparently willing to bear the guarantee cost.…”