Abstract
A major difficulty in determining the appropriate risk premium for lending to small businesses is the lack of market value information. This paper develops a mean-variance model that uses available failure rate data to establish a benchmark risk premium for lending to firms in specific industries. This model incorporates the benefits of diversifying across firms and industries. This paper also presents evidence that a random walk model provides the best forecast of future failure rates.
JEL Codes
G32, L25, G33
Keywords
Small Business, Loan Pricing, Interest rates, Borrowing
Recommended Citation
Ford, John K.
(1994)
"The Pricing of Small Business Loans,"
Journal of Small Business Finance:
Vol. 3:
Iss.
3, pp. 249-260.
DOI: https://doi.org/10.57229/2373-1761.1158
Available at:
https://digitalcommons.pepperdine.edu/jef/vol3/iss3/5
