The Higher Cost of Follow-Up Loans

The Higher Cost of Follow-Up Loans This paper uses unique data and looks at the interest margin for follow-up finance vis-à-vis first round-finance. Applying data for asset values, we examine the substitution between collateral and interest margins. Consistent with the theories of Bester (1985), Besanko and Thakor (1987) and the empirical evidence of Cressy (1996b), we find that a trade-off between collateral and interest margins exists. Our main result indicates that follow-up finance is more expensive for loans but not for overdrafts. We suggest that a relatively fixed asset base (Land and Buildings), as seen in higher security to loan values, raises the price and risk of successive financial increments. This explains the higher relative cost of follow-up finance to borrowers. Small Business Economics Springer Journals

The Higher Cost of Follow-Up Loans

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Kluwer Academic Publishers
Copyright © 2005 by Springer Science + Business Media, Inc.
Business and Management; Management; Microeconomics; Entrepreneurship; Industrial Organization
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