The cost of growth: small firms and the pricing of bank loans

Abstract

Drawing upon data from the 2007 UK Survey of SME Finance, the current analysis is concerned with the extent to which growth firms are discriminated on price in loan markets, or, more simply, the extent to which growth firms pay more for credit. Given relatively small turndown rates historically (Vos et al. in J Bank Finance 31(9):2648–2672, 2007), higher credit prices may be a more substantial growth constraint than the access to finance issues that have dominated the academic literature to date. To this end, we observe, inter alia, that firms who have recorded recent high growth are more likely to pay higher interest rates for the loan they obtained. Moreover, small-sized firms who intend to grow through the introduction of new products exhibit a higher probability of paying more for credit than their peers. Finally, acknowledging that banks are not risk funders, we discuss the potential policy implications of these findings.