Cost of capital and public loan guarantees to small firms

Journal article


Ughetto, Elisa, Scellato, Giuseppe and Cowling, Marc 2017. Cost of capital and public loan guarantees to small firms. Small Business Economics. https://doi.org/10.1007/s11187-017-9845-y
AuthorsUghetto, Elisa, Scellato, Giuseppe and Cowling, Marc
Abstract

In this paper, we study the determinants of the spread charged by banks under a UK policy intervention scheme, aimed at supporting access to the credit market for small firms through guarantee backed loans. We exploit a unique dataset containing data on 29,266 guarantee backed loans under the UK SFLG scheme over the period 2000 to 2005. Results suggest that lower spreads are offered for loans of larger amounts and higher durations, for service firms, for larger firms, and for those located in the most advanced regions. Higher spreads are applied to high-tech manufacturing firms and to loans issued for working capital purposes. We also find that the presence of other extant debt is associated with a relatively higher spread and that this effect is especially significant for the subset of firms that have reached a maximum debt capacity based on collateralized assets. Further, we also find that the higher the incidence of the publicly guaranteed debt over the total amount of outstanding loans, the lower, on average, the spread. However, an increase in the guaranteed coverage leads to a contraction in the spread only for loans aimed at covering working capital needs rather than investments.

KeywordsCost of debt; Small businesses; Public loan guarantee scheme; Credit market
Year2017
JournalSmall Business Economics
PublisherSpringer
ISSN1573-0913
Digital Object Identifier (DOI)https://doi.org/10.1007/s11187-017-9845-y
Web address (URL)http://hdl.handle.net/10545/625392
Attribution-NonCommercial 4.0 International
hdl:10545/625392
Publication dates09 Mar 2017
Publication process dates
Deposited20 Nov 2020, 16:02
Accepted13 Feb 2017
ContributorsPolitecnico di Torino, Torino, Italy and University of Derby
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