The determinants of collateral: a decision tree analysis of SME loans

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 small business credit contracts. We modelled the collateralisation decision as a two decision process by investigating the differences in the determinants of the collateral decision versus the determinants of the choice between business collateral and personal commitments. The analysis was performed by a decision tree analysis. In the classification models, we concentrate specifically on relationship characteristics. The results reveal that relationship characteristics have a significant influence but not always in the direction as could be expected. Moreover, they do not seem to be the primary determinants in our classification models. The most important determinants in both decision models seem to be the loan amount, total assets and the family versus non family firm distinction.