Evaluating guarantee fees for loans to small and medium-sized enterprises

Evaluating guarantee fees for loans to small and medium-sized enterprises Governments all over the world regard loan guarantee schemes (LGS) as one of the most regularly used and relatively effective mechanisms to support small and medium-sized enterprises (SMEs) financially by facilitating their access to debt capital. Due to its nature of involving implicit indirect subsidization, a LGS is mostly evaluated in terms of the economic and social benefits created, such as generation of export revenues and creation of employment opportunities. Although most government-sponsored programs do not set up clear-cut definitions for how to evaluate those benefits and what targets should be achieved, they do have an initial aim of self-financing. Since guarantee fees (premiums) represent the largest cash inflow for a guarantor and the most critical index to indicate a borrower’s credit status, this paper proposes a methodology that specifically aims for this self-financing target by meeting at least default costs with income from premiums. This is done by actuarially determining a guarantee fee for each loan based on market-based information and risk-neutrality concepts. Empirical evidence shows that real cash outflows (costs of honoring defaults) are very close to estimated cash inflows (total guarantee fees), which indicates that the objective of meeting budget constraints is achieved. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Small Business Economics Springer Journals

Evaluating guarantee fees for loans to small and medium-sized enterprises

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Publisher
Springer US
Copyright
Copyright © 2009 by Springer Science+Business Media, LLC.
Subject
Business and Management; Management; Microeconomics; Entrepreneurship; Industrial Organization
ISSN
0921-898X
eISSN
1573-0913
D.O.I.
10.1007/s11187-009-9236-0
Publisher site
See Article on Publisher Site

Abstract

Governments all over the world regard loan guarantee schemes (LGS) as one of the most regularly used and relatively effective mechanisms to support small and medium-sized enterprises (SMEs) financially by facilitating their access to debt capital. Due to its nature of involving implicit indirect subsidization, a LGS is mostly evaluated in terms of the economic and social benefits created, such as generation of export revenues and creation of employment opportunities. Although most government-sponsored programs do not set up clear-cut definitions for how to evaluate those benefits and what targets should be achieved, they do have an initial aim of self-financing. Since guarantee fees (premiums) represent the largest cash inflow for a guarantor and the most critical index to indicate a borrower’s credit status, this paper proposes a methodology that specifically aims for this self-financing target by meeting at least default costs with income from premiums. This is done by actuarially determining a guarantee fee for each loan based on market-based information and risk-neutrality concepts. Empirical evidence shows that real cash outflows (costs of honoring defaults) are very close to estimated cash inflows (total guarantee fees), which indicates that the objective of meeting budget constraints is achieved.

Journal

Small Business EconomicsSpringer Journals

Published: Oct 29, 2009

References

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