SMEs pay more for credits than large firms, their loans tend to be granted against collateral and on short repayment terms, and many are redlined. These practices have usually been interpreted as financial-market imperfections that discriminate against SMEs. We argue that they are responses to i) the higher average cost of smaller loans; ii) the selection problems due to the natural replacement of business in all industries, which is much more acute among SMEs; iii) the need to align the incentives of financiers and entrepreneurs when information is asymmetric. We show that these practices are widespread in countries where capital markets are developed. We also make several proposals to increase access to financing by SMEs.
|Number of pages||38|
|State||Published - Apr 2005|