Article

An Analysis of Commercial Bank Lending Criteria for Small Business Loans: An Experimental Study

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Abstract

This study examines two recognised bank lending criteria, security and management competence/ reputation, on lenders’ assessment of a small business applicant’s ability to repay debt. A limited amount of empirical research has been conducted from the banking sectors perspective on lending, to explain the existence of a small business ‘finance gap’ and the importance/or otherwise of the factors underlying the lenders’ judgement of assessment of repayment likelihood.Results of a field experiment indicate that security is not a major consideration in lenders’ loan assessments. However, lenders insistence upon security implies that lenders are concerned with borrowers who have an ability to repay loans, and who minimise the lenders’ risks. The results also indicate that management competence/reputation is a significant factor in the lenders’ assessment of a small business applicant’s repayment ability.

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