How does a small firm end up with a more expensive loan guarantee when a cheaper and safer one was on offer? The intriguing case of two UK Covid-19 guarantee schemes

Marc Cowling, Nick Wilson and Weixi Liu

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: Most countries introduced loan guarantee schemes in the Covid-19 pandemic, and the UK offered two schemes. The BBL scheme had a cap of £50,000, a 100 % guarantee, and a fixed interest rate of 2.5 %. The CBILS scheme had a cap of £5 m, an 80 % guarantee and lenders set interest rates. We exploit a behavioural anomaly that led to 9,989 firms taking a CBILS loan for a cash amount below the BBL loan cap. Larger and older firms were more likely to be in this loan class and this is caused by lender sorting of firms by risk.

Keywords: Loan guarantees; Covid-19; Small firms; Loan contracts; Loan default (search for similar items in EconPapers)
JEL-codes: D81 G01 G18 G21 H12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324008572

DOI: 10.1016/j.frl.2024.105827

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