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Measuring the Default Risk of Small Business Loans: A Survival Analysis Approach

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  • Glennon, Dennis
  • Nigro, Peter

Abstract

In this paper we report that, although medium-maturity loans originated under the SBA 7(a) loan guarantee program are targeted to small firms that fail to obtain credit through conventional channels, the default experience is comparable to that of a large percentage of loans held by larger commercial banks. We establish that the default behavior of these loans is time sensitive--as a loan seasons, the likelihood of default increases initially, peaks in the second year, and declines thereafter. Using a discrete-time hazard framework, we show that the likelihood of default is conditional on borrower, lender, and loan characteristics, and changes in economic conditions.

Suggested Citation

  • Glennon, Dennis & Nigro, Peter, 2005. "Measuring the Default Risk of Small Business Loans: A Survival Analysis Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 923-947, October.
  • Handle: RePEc:mcb:jmoncb:v:37:y:2005:i:5:p:923-47
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    Cited by:

    1. repec:bpj:strimo:v:34:y:2017:i:1-2:p:55-67:n:1 is not listed on IDEAS
    2. DeYoung, Robert & Glennon, Dennis & Nigro, Peter, 2008. "Borrower-lender distance, credit scoring, and loan performance: Evidence from informational-opaque small business borrowers," Journal of Financial Intermediation, Elsevier, vol. 17(1), pages 113-143, January.
    3. Andrew T. Young & Matthew J. Higgins & Donald J. Lacombe & Briana Sell, 2014. "The Direct and Indirect Effects of Small Business Administration Lending on Growth: Evidence from U.S. County-Level Data," Working Papers 14-35, Department of Economics, West Virginia University.
    4. Erica Field & Rohini Pande & John Papp & Natalia Rigol, 2013. "Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India," American Economic Review, American Economic Association, vol. 103(6), pages 2196-2226, October.
    5. Ferreira Filipe, Sara & Grammatikos, Theoharry & Michala, Dimitra, 2014. "Forecasting Distress in European SME Portfolios," MPRA Paper 53572, University Library of Munich, Germany.
    6. Neus Herranz & Stefan Krasa & Anne Villamil, 2009. "Small firms in the SSBF," Annals of Finance, Springer, vol. 5(3), pages 341-359, June.
    7. Dimitra Michala & Theoharry Grammatikos & Sara Ferreira Filipe, 2013. "Forecasting distress in European SME portfolios," LSF Research Working Paper Series 13-2, Luxembourg School of Finance, University of Luxembourg.
    8. Diego Valderrama & Katheryn N. Russ, "undated". "A Theory of Banks, Bonds, and the Distribution of Firm Size," Working Papers 915, University of California, Davis, Department of Economics.
    9. Michala, Dimitra & Grammatikos, Theoharry & Ferreira Filipe, Sara, 2013. "Forecasting distress in European SME portfolios," EIF Working Paper Series 2013/17, European Investment Fund (EIF).
    10. Bruce L. Dixon & Bruce L. Ahrendsen & Brandon R. McFadden & Diana M. Danforth & Monica Foianini & Sandra J. Hamm, 2011. "Competing risks models of Farm Service Agency seven-year direct operating loans," Agricultural Finance Review, Emerald Group Publishing, vol. 71(1), pages 5-24, May.
    11. Bruneau, C. & de Bandt, O. & El Amri, W., 2012. "Macroeconomic fluctuations and corporate financial fragility," Journal of Financial Stability, Elsevier, vol. 8(4), pages 219-235.
    12. repec:eee:jbfina:v:91:y:2018:i:c:p:160-175 is not listed on IDEAS
    13. Ellis Kofi, Akwaa-Sekyi & Portia, Bosompra, 2015. "Determinants of business loan default in Ghana," MPRA Paper 71961, University Library of Munich, Germany.
    14. Filipe, Sara Ferreira & Grammatikos, Theoharry & Michala, Dimitra, 2016. "Forecasting distress in European SME portfolios," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 112-135.
    15. Bams, Dennis & Pisa, Magdalena & Wolff, Christian C, 2012. "Modeling default correlation in a US retail loan portfolio," CEPR Discussion Papers 9205, C.E.P.R. Discussion Papers.
    16. Yehning Chen & Rachel Huang & John Tsai & Larry Tzeng, 2015. "Soft Information and Small Business Lending," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(1), pages 115-133, February.
    17. Bams, Dennis & Pisa, Magdalena & Wolff, Christian C, 2015. "Credit risk characteristics of US small business portfolios," CEPR Discussion Papers 10889, C.E.P.R. Discussion Papers.
    18. repec:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-016-2143-2 is not listed on IDEAS
    19. repec:luc:wpaper:13-2 is not listed on IDEAS
    20. Mariusz Górajski & Dobromił Serwa & Zuzanna Wośko, 2016. "Measuring expected time to default under stress conditions for corporate loans," NBP Working Papers 237, Narodowy Bank Polski, Economic Research Department.
    21. Ewa Wycinka, 2015. "Modelling Time to Default Or Early Repayment as Competing Risks (Modelowanie czasu do zaprzestania splat rat kredytu lub wczesniejszej splaty kredytu jako zdarzen konkurujacych )," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 13(55), pages 146-157.
    22. Dennis Glennon & Peter Nigro, 2005. "An Analysis of SBA Loan Defaults by Maturity Structure," Journal of Financial Services Research, Springer;Western Finance Association, vol. 28(1), pages 77-111, October.
    23. Sarah Sanya & Montfort Mlachila, 2010. "Post-Crisis Bank Behavior; Lessons From Mercosur," IMF Working Papers 10/1, International Monetary Fund.
    24. Russ, Katheryn N. & Valderrama, Diego, 2012. "A theory of bank versus bond finance and intra-industry reallocation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 652-673.

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