The incidence of personal collateral in small business lending

Abstract

Previous empirical research has devoted little effort on the role and determinants of business collateral and personal commitments in the credit acquisition process, even though this is a common feature of many small business credit contracts. This paper provides new empirical evidence on the determinants of business collateral and personal commitments. Starting from theoretically important factors concerning the use of collateral, a multinomial logit model is used to determine simultaneously the determinants of both kinds of commitments. The results, based on a database of small business credit approvals from a Belgian retail bank, suggest that loan, lender and firm characteristics are of minor importance. Only firm size, profitability, industry, use of trade credit and the organization as a family firm seem to matter. On the other hand, variables concerning the relationship between lender and borrower seem to be of major importance.