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Is it Possible to Finance SMEs without an Excessive Reliance on Personal Guarantees and Collateral?

Author

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  • Iichiro Uesugi

    (Hitotsubashi University)

Abstract

As part of its intervention in SME finance the Japanese government has promoted SME lending that does not overly rely on collateral or personal guarantees. We examine the plausibility of such a policy action. In the early mid-2000s government-affiliated financial institutions introduced a scheme that let firms choose between unsecured and secured loans and between loans that did not require personal guarantees from management and loans that did require such guarantees. What have government-affiliated financial institutions learned? How effective has the scheme been? With regard to personal guarantees it was found that covenants (financial covenants included in a loan contract) may substitute for managerial discipline imposed by personal guarantees. With regard to unsecured lending, firms that previously would not have been able to borrow due to a lack of collateralizable assets increased their borrowing and investment. However, the ex-post performance of firms with collateralizable assets that chose to borrow without collateral deteriorated. When firms’ moral hazard is the cause of poor performance a mechanism is needed to curb this behavior when providing unsecured loans.

Suggested Citation

  • Iichiro Uesugi, 2025. "Is it Possible to Finance SMEs without an Excessive Reliance on Personal Guarantees and Collateral?," Advances in Japanese Business and Economics,, Springer.
    • Handle: RePEc:spr:advchp:978-981-96-3193-3_9
    DOI: 10.1007/978-981-96-3193-3_9
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