The cost of debt for small firms: Evidence from Australia

Scott Holmes, Keitha Dunstan, David Dwyer

Research output: Contribution to journalArticleResearchpeer-review

Abstract

In reviewing the cost of debt and the cost of loan applications for small, medium, and large firms representing several industry groups in Australia, this research is based on a mail survey of private sector firms. Overall, an observed difference of 2 percent in favor of large firms was recognized, with only limited evidence of statistically significant interest rate differentials. The observed difference may be attributed to the relatively higher administrative cost incurred by lending institutions in carrying relatively small loans and overdraft levels. If this view is accepted, then it would suggest that the respondents belonged to the same risk category. Consequently, only those firms which fit a lending institution's risk profile will receive funding. In order for a small firm to obtain financing it must convince the lending institution that it fits their lending profile, but these efforts can be costly. The costs associated with satisfying the lenders' information requirements represented a significantly greater proportion of total funds borrowed for relatively smaller firms. The implications of these results for small firms are discussed.
Original languageEnglish
Pages (from-to)27-35
Number of pages8
JournalJournal of Small Business Management
Volume32
Issue number1
Publication statusPublished - 1994
Externally publishedYes

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Costs
Lending
Small firms
Cost of debt
Industry
Loans
Large firms
Mail survey
Information requirements
Overdraft
Administrative costs
Proportion
Funding
Financing
Private sector
Interest rate differentials
Reviewing

Cite this

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title = "The cost of debt for small firms: Evidence from Australia",
abstract = "In reviewing the cost of debt and the cost of loan applications for small, medium, and large firms representing several industry groups in Australia, this research is based on a mail survey of private sector firms. Overall, an observed difference of 2 percent in favor of large firms was recognized, with only limited evidence of statistically significant interest rate differentials. The observed difference may be attributed to the relatively higher administrative cost incurred by lending institutions in carrying relatively small loans and overdraft levels. If this view is accepted, then it would suggest that the respondents belonged to the same risk category. Consequently, only those firms which fit a lending institution's risk profile will receive funding. In order for a small firm to obtain financing it must convince the lending institution that it fits their lending profile, but these efforts can be costly. The costs associated with satisfying the lenders' information requirements represented a significantly greater proportion of total funds borrowed for relatively smaller firms. The implications of these results for small firms are discussed.",
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The cost of debt for small firms: Evidence from Australia. / Holmes, Scott; Dunstan, Keitha; Dwyer, David.

In: Journal of Small Business Management, Vol. 32, No. 1, 1994, p. 27-35.

Research output: Contribution to journalArticleResearchpeer-review

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AB - In reviewing the cost of debt and the cost of loan applications for small, medium, and large firms representing several industry groups in Australia, this research is based on a mail survey of private sector firms. Overall, an observed difference of 2 percent in favor of large firms was recognized, with only limited evidence of statistically significant interest rate differentials. The observed difference may be attributed to the relatively higher administrative cost incurred by lending institutions in carrying relatively small loans and overdraft levels. If this view is accepted, then it would suggest that the respondents belonged to the same risk category. Consequently, only those firms which fit a lending institution's risk profile will receive funding. In order for a small firm to obtain financing it must convince the lending institution that it fits their lending profile, but these efforts can be costly. The costs associated with satisfying the lenders' information requirements represented a significantly greater proportion of total funds borrowed for relatively smaller firms. The implications of these results for small firms are discussed.

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