[Journal:] Journal of Small Business Finance [ISSN:] 1057-2287 [Volume:] 3 [Year:] 1994 [Issue:] 3 [Pages:] 249-260
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.
Small Business Loan Pricing Interest rates Borrowing