The use of personal guarantees in Irish SME lending
James Carroll (),
Fergal McCann () and
Conor O'Toole ()
No 06/EL/15, Economic Letters from Central Bank of Ireland
This Letter describes the use of personal guarantees (PGs) in Irish SME bank lending. To date, domestic or international evidence on this topic has been extremely sparse. Using data from the Red C / Department of Finance SME Credit Demand Survey, we show that one third of successful finance applications in Ireland from September 2012 to 2014 have a PG attached, with the most recent data suggesting that this rate was decreasing in 2014. Consistent with banks using PGs as a deterrent to default for borrowers perceived to be riskier, we find that PG usage is higher for new loans to smaller firms (in terms of both employment and turnover), younger firms, innovative firms, non-exporting firms and firms that made a loss in the previous six months. PGs are more prevalent among higher-value loans, suggesting PGs may also be used to reduce potential Loss Given Default. We also find that firms in the construction and wholesale/retail sector are most likely to have a PG attached to new lending. Finally, we find strong evidence that PGs are used in tandem with other forms of tangible business collateral such as land, buildings, machinery and other assets.
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