The Pricing of Small Business Loans

John K. Ford
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John K. Ford: University of Maine

Journal of Entrepreneurial Finance, 1994, vol. 3, issue 3, 249-260

Abstract: A major difficulty in determining the appropriate risk premium for lending to small businesses is the lack of market value information. This paper develops a mean-variance model that uses available failure rate data to establish a benchmark risk premium for lending to firms in specific industries. This model incorporates the benefits of diversifying across firms and industries. This paper also presents evidence that a random walk model provides the best forecast of future failure rates.

Keywords: Small Business; Loan Pricing; Interest rates; Borrowing (search for similar items in EconPapers)
JEL-codes: G32 G33 L25 (search for similar items in EconPapers)
Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:pep:journl:v:3:y:1994:i:3:p:249-260

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