Relationships and the Use of Collateral: Evidence from Small Business Finance

Atreya Chakraborty () and Charles Hu

Claremont Colleges Working Papers from Claremont Colleges

Abstract: Informational asymmetries in financing small business require lenders to continually produce reliable private information about borrower performance. While it is well recognized that information required to monitor short-term working capital loans is quite different from long-term non-recurring loans, yet empirical literature on this issue is in its early stages. This paper shows how the two primary sources of private information - length of bank-borrower relationship and the number of bank-services used - affect collateral requirements for Lines of credit (L/C) loans differently from all other non-recurring loans (non-L/Cs). Our findings confirm previous finding that borrowers with longer relationship are less likely to pledge collateral only for lines of credits (L/Cs). For all non-recurring loans (non-L/Cs) however, the number of financial services used by the borrower (and not the length of the relationship) lowers the incidence of collateral. This new evidence indicates that information generated from banking-relationship may be qualitatively different from information generated from banking-services.

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Persistent link: http://EconPapers.repec.org/RePEc:clm:clmeco:1999-22

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