Small Business Economics

, Volume 30, Issue 4, pp 361–383 | Cite as

Lending to small businesses: the role of loan maturity in addressing information problems

Article

Abstract

We investigate what determines the maturity of lines of credit to small businesses. Our results provide strong support for the hypothesis that shorter loan maturities serve to mitigate the problems associated with borrower risk and asymmetric information that are typical of small business lending. We find that maturity is shorter for firm owners that have poor credit histories, are older, and less experienced, and for firms that are more informationally opaque. Supporting the notion that collateral and maturity are substitute mechanisms in mitigating agency problems, we also find strong evidence that maturity increases with collateral pledges, that personal collateral is associated with longer maturities than business collateral, and that collateral types that better mitigate agency problems reduce the sensitivity of loan maturity to informational asymmetries and risk. Finally, while it is argued that relationship lending may mitigate information asymmetry, we find no relation between loan maturity and stronger firm-creditor ties.

Keywords

Loan maturity Collateral Small businesses Relationship lending 

JEL Classification

G21 G32 L26 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Sauder School of BusinessThe University of British ColumbiaVancouverCanada
  2. 2.Department of FinanceUniversity of TilburgTilburgNetherlands

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