Abstract
Drawing upon data from the 2007 UK Survey of SME Finance, the current analysis is concerned with the extent to which growth firms are discriminated on price in loan markets, or, more simply, the extent to which growth firms pay more for credit. Given relatively small turndown rates historically (Vos et al. in J Bank Finance 31(9):2648–2672, 2007), higher credit prices may be a more substantial growth constraint than the access to finance issues that have dominated the academic literature to date. To this end, we observe, inter alia, that firms who have recorded recent high growth are more likely to pay higher interest rates for the loan they obtained. Moreover, small-sized firms who intend to grow through the introduction of new products exhibit a higher probability of paying more for credit than their peers. Finally, acknowledging that banks are not risk funders, we discuss the potential policy implications of these findings.
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Notes
In the UK, this is typically the Bank of England base rate plus some premium determined by individual banks.
To confirm our intuition, we performed a similar suite of analyses on fixed rate loans. As expected, these models were poor predictors of loan rate, with few significant variables. The results are available on request.
The survey question specified the 30 % threshold.
As a robustness check, we coded only those firms declaring an intention to grow substantially as 1, otherwise 0. The results were unchanged.
We are grateful to an anonymous reviewer for raising this possibility.
This would include cases where the principal ownership was female or shared.
The results of first-stage probit regression are available on demand.
Another model considering the use of variable rate loans as the dependent variable of the probit (selection) model was also estimated. The results were broadly in line with the reported approach.
We are grateful to anonymous reviewer for raising this possibility.
Informal conversations with British banking professionals suggest that this is a reasonable supposition. The things that “mattered” stayed the same. Rather, it is the threshold at which they matter that changed during the crisis.
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Rostamkalaei, A., Freel, M. The cost of growth: small firms and the pricing of bank loans. Small Bus Econ 46, 255–272 (2016). https://doi.org/10.1007/s11187-015-9681-x
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DOI: https://doi.org/10.1007/s11187-015-9681-x