Small Business Economics

, Volume 34, Issue 3, pp 243–259 | Cite as

Collateral, relationship lending and family firms



Prior research suggested that relationship lending could play a role in solving asymmetric information problems between borrower and lender. Other studies suggest a relationship between family ownership and the shareholder–bondholder agency conflict. The present paper investigates the impact of relationship characteristics, family ownership and their interaction effects upon the use of collateral in SME lending. We examine the determinants of collateral as well as the determinants of the choice between business and personal collateral using decision tree analysis. The results reveal that relationship characteristics have a significant influence, but not always in the direction as expected. Moreover, they do not seem to be the primary determinants in our classification models. The most important determinants in both classification models seem to be the loan amount, total assets and the family versus non-family firm distinction. In addition, we differentiate between line-of-credit and non-line-of-credit loans and find significant differences between these decision trees.


Relationship lending Collateral SME Private family firms Decision tree analysis 

JEL Classifications



  1. Ai, C., & Norton, E. C. (2003). Interaction terms in logit and probit models. Economics Letters, 80, 123–129.CrossRefGoogle Scholar
  2. Altman, E. I., Haldeman, R. G., & Narayanan, P. (1977). Zeta analysis: A new model to identify bankruptcy risk of corporations. Journal of Banking and Finance, 1, 29–54.CrossRefGoogle Scholar
  3. Anderson, R., Mansi, S., & Reeb, D. (2003). Founding family ownership and the agency cost of debt. Journal of Financial Economics, 68, 263–285.CrossRefGoogle Scholar
  4. Ang, J. S. (1991). Small business uniqueness and the theory of financial management. Journal of Small Business Finance, 1(1), 1–13.Google Scholar
  5. Ang, J. S. (1992). On the theory of finance for privately held firms. Journal of Small Business Finance, 1(3), 185–203.Google Scholar
  6. Ang, J., Lin, J., & Tyler, F. (1995). Evidence on the lack of separation between business and personal risks among small businesses. Journal of Small Business Finance, 4, 197–210.Google Scholar
  7. Avery, R., Bostic, R., & Samolyk, K. (1998). The role of personal wealth in small business finance. Journal of Banking and Finance, 22, 1019–1061.CrossRefGoogle Scholar
  8. Baas, T., & Schrooten, M. (2007). Relationship banking and SMEs: A theoretical analysis. Small Business Economics, 27, 127–137.CrossRefGoogle Scholar
  9. Berger, A. N., & Frame, W. S. (2007). Small business credit scoring and credit availability. Journal of Small Business Management, 45(1), 5–22.CrossRefGoogle Scholar
  10. Berger, A. N., & Udell, G. F. (1990). Collateral, loan quality, and bank risk. Journal of Monetary Economics, 25, 21–42.CrossRefGoogle Scholar
  11. Berger, A. N., & Udell, G. F. (1995). Relationship lending and lines of credit in small firm finance. Journal of Business, 68, 351–381.CrossRefGoogle Scholar
  12. Berger, A. N., & Udell, G. F. (2002). Small business credit availability and relationship lending: The importance of bank organisational structure. Economic Journal, 112, F32–F53.CrossRefGoogle Scholar
  13. Berger, A. N., Klapper, N., & Udell, G. F. (2001). The ability of banks to lend to informationally opaque small businesses. Journal of Banking and Finance, 25, 2127–2167.CrossRefGoogle Scholar
  14. Besanko, D., & Thakor, A. (1987). Collateral and rationing: Sorting equilibria in monopolistic and competitive credit markets. International Economic Review, 28, 671–689.CrossRefGoogle Scholar
  15. Bester, H. (1985). Screening vs. rationing in credit markets with imperfect information. American Economic Review, 75, 850–855.Google Scholar
  16. Blumberg, B., & Letterie, W. (2008). Business starters and credit rationing. Small Business Economics, 30, 187–200.CrossRefGoogle Scholar
  17. Bodenhorn, H. (2003). Short-term loans and long-term relationships: Relationship lending in Early America. Journal of Money, Credit and Banking, 35, 485–505Google Scholar
  18. Boot, A. W. A. (2000). Relationship banking: What do we know? Journal of Financial Intermediation, 9(1), 7–25.CrossRefGoogle Scholar
  19. Boot, A., & Thakor, A. (1994). Moral hazard and secured lending in an infinitely repeated credit market game. International Economic Review, 35, 899–920.CrossRefGoogle Scholar
  20. Bopaiah, C. (1998). Availability of credit to family businesses. Small Business Economics, 11, 75–86.CrossRefGoogle Scholar
  21. Brick, I. E., & Palia, D. (2007). Evidence of jointness in the terms of relationship lending. Journal of Financial Intermediation, 16, 452–476.CrossRefGoogle Scholar
  22. Chen, Y. (2006). Collateral, loan guarantees, and the lenders’ incentives to resolve financial distress. Quarterly Review of Economics and Finance, 46, 1–15.CrossRefGoogle Scholar
  23. Chakraborty, A., & Hu, C. (2006). Lending relationships in line-of-credit and nonline-of-credit loans: Evidence from collateral use in small business. Journal of Financial Intermediation, 15, 86–107.CrossRefGoogle Scholar
  24. Chan, Y. S., & Kanatas, G. (1985). Asymmetric valuation and the role of collateral in loan agreements. Journal of Money, Credit and Banking, 17, 85–95.CrossRefGoogle Scholar
  25. Chan, Y. S., & Thakor, A. V. (1987). Collateral and competitive equilibria with moral hazard and private information. Journal of Finance, 42, 345–363.CrossRefGoogle Scholar
  26. Chrisman, J., Chua, J., & Litz, R. (2004). Comparing the agency costs of family and non-family firms: Conceptual issues and exploratory evidence. Entrepreneurship: Theory & Practice, 28, 335–354.CrossRefGoogle Scholar
  27. Cole, R. A., Goldberg, L., & White, L. (2004). Cookie-cutter versus character: The micro structure of small business lending by large and small banks. Journal of Financial and Quantitative Analysis, 39, 227–251.CrossRefGoogle Scholar
  28. Colombo, M. G., & Grilli, L. (2007). Funding gaps? Access to bank loans by high-tech start-ups. Small Business Economics, 29, 25–46.CrossRefGoogle Scholar
  29. Cressy, R. (1996). Commitment lending under asymmetric information: Theory and tests on U.K. startup data. Small Business Economics, 8, 397–408.CrossRefGoogle Scholar
  30. Cressy, R., & Toivanen, O. (2001). Is there adverse selection in the credit market? Venture Capital, 3(3), 215–238.CrossRefGoogle Scholar
  31. Degryse, H., & Van Cayseele, P. (2000). Relationship lending within a bank-based system: Evidence from European small business data. Journal of Financial Intermediation, 9, 90–109.CrossRefGoogle Scholar
  32. Dennis, S., Nandy, D., & Sharpe, I. (2000). The determinants of contract terms in bank revolving credit agreements. Journal of Financial and Quantitative Analysis, 35, 87–110.CrossRefGoogle Scholar
  33. Diamond, D. (1989). Reputation acquisition in debt markets. Journal of Political Economy, 97, 828–860.CrossRefGoogle Scholar
  34. Diamond, D. (1991). Monitoring and reputation: The choice between bank loans and directly placed debt. Journal of Political Economy, 99, 688–721.Google Scholar
  35. Elsas, R., & Krahnen, J. P. (2000). Collateral, default risk and relationship lending: an empirical study on financial contracting. CEPR Discussion paper 2540.Google Scholar
  36. Freel, M. (2007). Are small innovators credit rationed? Small Business Economics, 28, 23–35.CrossRefGoogle Scholar
  37. Hanley, A., & Girma, S. (2006). New ventures and their credit terms. Small Business Economics, 26, 351–364.CrossRefGoogle Scholar
  38. Harhoff, D., & Körting, T. (1998). Lending relationships in Germany–Empirical evidence from survey data. Journal of Banking and Finance, 22, 1317–1353.CrossRefGoogle Scholar
  39. Hernández-Cánovas, G., & Martínez-Solano, P. (2007). Effect of the number of banking relationships on credit availability: Evidence from panel data of Spanish small firms. Small Business Economics, 28, 37–53.CrossRefGoogle Scholar
  40. Hernández-Cánovas, G., & Martínez-Solano, P. (2006). Banking relationships: Effects on debt terms for small Spanish firms. Journal of Small Business Management, 44, 315–333.CrossRefGoogle Scholar
  41. Hoetker, G. (2007). The use of logit and probit models in strategic management research: Critical issues. Strategic Management Journal, 28, 331–343.CrossRefGoogle Scholar
  42. Inderst, R., & Mueller, H. M. (2007). A lender-based theory of collateral. Journal of Financial Economics, 84, 826–859.CrossRefGoogle Scholar
  43. Jackson, T. H., & Kronman, A. T. (1979). Secured financing and priorities among creditors. The Yale Law Journal, 88, 1143–1182.CrossRefGoogle Scholar
  44. Jensen, M., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.CrossRefGoogle Scholar
  45. Jiménez, G., & Saurina, J. (2004). Collateral, type of lender and relationship banking as determinants of credit risk. Journal of Banking and Finance, 28(9), 2191–2212.CrossRefGoogle Scholar
  46. Jiménez, G., Salas, V., & Saurina, J. (2006). Determinants of collateral. Journal of Financial Economics, 81, 255–281.CrossRefGoogle Scholar
  47. John, K., Lynch, A. W., & Puri, M. (2003). Credit ratings, collateral and loan characteristics: Implications for yield. Journal of Business, 76, 371–409.CrossRefGoogle Scholar
  48. Leeth, J. D., & Scott, J. A. (1989). The incidence of secured debt: Evidence from the small business community. Journal of Financial and Quantitative Analysis, 24, 379–394.CrossRefGoogle Scholar
  49. Lehmann, E., & Neuberger, D. (2001). Do lending relationships matter? Evidence from bank survey data in Germany. Journal of Economic Behavior and Organization, 45, 339–359.CrossRefGoogle Scholar
  50. Machauer, A., & Weber, M. (1998). Bank behavior based on internal credit ratings of borrowers. Journal of Banking and Finance, 22, 1355–1384.CrossRefGoogle Scholar
  51. Mann, R. J. (1997a). Explaining the pattern of secured debt. Harvard Law Review, 110, 625–683.CrossRefGoogle Scholar
  52. Mann, R. J. (1997b). The role of secured credit in small-business lending. The Georgetown Law Journal, 86, 1–44.Google Scholar
  53. Manove, M., Padilla, J., & Pagano, M. (2001). Collateral versus project screening: A model of lazy banks. RAND Journal of Economics, 32, 726–744.CrossRefGoogle Scholar
  54. Mayer, C. (1988). New issues in corporate finance. European Economic Review, 32, 1167–1189.CrossRefGoogle Scholar
  55. Menkhoff, L., Neuberger, D., & Suwanaporn, C. (2006). Collateral-based lending in emerging markets: evidence from Thailand. Journal of Banking and Finance, 30, 1–21.CrossRefGoogle Scholar
  56. Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5, 147–175.CrossRefGoogle Scholar
  57. Neher, D. (1999). Staged financing: An agency perspective. Review of Economic Studies, 66, 255–274.CrossRefGoogle Scholar
  58. Ongena, S., & Smith, D. C. (2001). The duration of bank relationships. Journal of Financial Economics, 61, 449–475.CrossRefGoogle Scholar
  59. Ortiz-Molina, H., & Penas, M. (2008). Lending to small businesses: The role of loan maturity in addressing information problems. Small Business Economics, 30, 361–383.CrossRefGoogle Scholar
  60. Petersen, M. A., & Rajan, R. G. (1994). Benefits of lending relationships: Evidence from small business data. Journal of Finance, 49, 3–37.CrossRefGoogle Scholar
  61. Petersen, M. A., & Rajan, R. G. (1995). The effect of credit market competition on lending relationships. Quarterly Journal of Economics, 110, 407–443.CrossRefGoogle Scholar
  62. Quinlan, J. R. (1987). Programs for machine learning. (Morgan Kauffman)Google Scholar
  63. Quinlan, J. R. (1993). Simplifying decision trees. International Journal of Man-Machine Studies, 27, 221–234.CrossRefGoogle Scholar
  64. Rajan, R. (1992). Insiders and outsiders: The choice between informed and arm’s length debt. Journal of Finance, 47, 1367–1400.CrossRefGoogle Scholar
  65. Schulze, W., Lubatkin, M., & Dino, R. (2003). Exploring the agency consequences of ownership dispersion among the directors of private family firms. Academy of Management Journal, 46(2), 179–194.CrossRefGoogle Scholar
  66. Scott, J. H., Jr. (1977). Bankruptcy, secured debt, and optimal capital structure. Journal of Finance, 32, 21–48.CrossRefGoogle Scholar
  67. Sharma, P., Chisman, J. J., & Chua, J. H. (1997). Strategic management of the family business: Past research and future challenges. Family Business Review, 10, 1–35.CrossRefGoogle Scholar
  68. Sharpe, S. (1990). Asymmetric information, bank lending and implicit contract: A stylized model of customer relationships. Journal of Finance, 45, 1069–1087.CrossRefGoogle Scholar
  69. Smith, C. W., & Warner, J. B. (1979). On financial contracting: An analysis of bond covenants. Journal of Financial Economics, 7, 117–162.CrossRefGoogle Scholar
  70. Stiglitz, J., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71, 393–410.Google Scholar
  71. Stulz, R. M., & Johnson, H. (1985). An analysis of secured debt. Journal of Financial Economics, 14, 501–521.CrossRefGoogle Scholar
  72. Toivanen, O., & Cressy, R. (2001). Lazy firms or dominant banks? An analysis of the UK market for SME loans. Warwick Business School SME Centre Working PaperGoogle Scholar
  73. Voordeckers, W., & Steijvers, T. (2006). Business collateral and personal commitments in SME lending. Journal of Banking and Finance, 30, 3067–3086.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  • Tensie Steijvers
    • 1
  • Wim Voordeckers
    • 1
  • Koen Vanhoof
    • 2
  1. 1.KIZOK Research CenterHasselt UniversityDiepenbeekBelgium
  2. 2.IMOBHasselt UniversityDiepenbeekBelgium

Personalised recommendations