Lending To Small Businesses: The Role Of Loan Maturity In Addressing Information Problems

The authors investigate what determines the maturity of lines of credit to small businesses. The results provide strong support for the hypothesis that shorter loan maturities serve to mitigate the problems associated with borrower risk and asymmetric information that are typical of small business lending. It's found that maturity is shorter for firm owners that have poor credit histories, are older, and less experienced, and for firms that are more informationally opaque. Supporting the notion that collateral and maturity are substitute mechanisms in mitigating agency problems, the authors also found strong evidence that maturity increases with collateral pledges, that personal collateral is associated with longer maturities than business collateral.