The cost of debt for small firms: Evidence from Australia

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.