The Valuation and Cost of Credit Insurance Schemes for SMEs: The Role of the Loan Guarantee Associations

Abstract

David Camino And Clara Cardone are both associate professors of Accounting and financeat the Department of Business economics at Universidad Carlos III de Madrid, Spain, Small and Medium enterprise (SEMs) have important limitations from the finanicial viewpoint. Their reduced capability to generate resources (Self financing) and their high finanical cost as compared with the profitability of investment, makes them highly dependent on short-term highly dependednt on short-term bank finanicing, among the different mechanisms used to solve these financial problems are credit guarantee schems such as Loan Guarantee Association (LGA). These (mutual or government granted) credit insurance system were set up to ease the acces of SMEs to the credit market by convering part of the loss incureed when borrowers deefaulted on lons. In spite of some legal differencde, LGAs in most European Union countries function in fairly similary ways, thereofre making it esier to compare their operationsl cost and impact on business. This study provides a model for the valuation of cost and implicit benefits associated with loan guarantee programmes. Empirical results indicate that the use of LGAs is likely to differ among SMEs depending on company size and ebt fincial cost. The relativel high cost of the loan guarantee is not always fully compensated with a similar reduction in the interest rates of the financing hindering the full development of the schemes.