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.
G32, L25, G33
Small Business, Loan Pricing, Interest rates, Borrowing
Ford, John K.
"The Pricing of Small Business Loans,"
Journal of Small Business Finance:
3, pp. 249-260.
Available at: http://digitalcommons.pepperdine.edu/jef/vol3/iss3/5