Lending to Small Businesses: The Role of Loan Maturity in Addressing Information Problems

37 Pages Posted: 29 Feb 2004

See all articles by María Fabiana Penas

María Fabiana Penas

Universidad Torcuato Di Tella

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

Date Written: May 2006

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

Suggested Citation

Penas, María Fabiana and Ortiz-Molina, Hernan, Lending to Small Businesses: The Role of Loan Maturity in Addressing Information Problems (May 2006). Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=509882 or http://dx.doi.org/10.2139/ssrn.509882

María Fabiana Penas

Universidad Torcuato Di Tella ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Hernan Ortiz-Molina (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-6095 (Phone)
604-822-4695 (Fax)

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