Personal Guarantees, Loan Pricing and Lending Structure in Finnish Small Business Loans

Abstract

This study analyzes the role of personal guarantees and collateral in the context of two different lending structures, one transaction - and the other relationship-based. The Finnish bank data which were uniquely accessible for the study enabled an exploration of credit files with specific details of the characteristics of the lending relationship during the period 1995-2001. According to the empirical results, the use of personal guarantees is an indication of transactional-based lending. Personal guarantees seem to increase the loan premium in transactional-based loans more than in relationship-based loans. Close ties between a bank and a firm seem to be a desirable basis for SME bank lending.

Keywords: personal guarantee, collateral, relationship banking, loan pricing, small business bank lending

JEL Classification: G21, M14, M21