| Abstract: | The available empirical evidence provides mixed views of small businesses' relative bankruptcy risk. The difference between Churchill and Lewis' findings and SBA's and Kirchhoffs' may well lie in the difference in definition of firm “size” used. Risk is not evenly spread; the smallest businesses seem to be less risky than the intermediate size businesses. Yet, Churchill and Lewis' actual loss evidence suggests that small business risk is only marginally greater than for large businesses, the loss rate is still equivalent to less than one half of one percent. The assumptions that lenders will adjust the amount of debt they allow small business clients rather than the interest rate is not rejected by this evidence. In fact, the much higher profitability of the small business department reported by Churchill and Lewis suggests that the bank's loan interest rates are more than high enough to cover loss risk and fixed costs, and borrowers provide profitable deposits. Thus, the logic of my utility theory hypothesis provides a reasonable explanation for the relatively higher debt levels of small firms compared to large firms. But, then the Kirchhoffs' findings cast some doubt on whether small firms actually have higher debt levels. None of these findings justify the 2.75 percent interest rate spread allowed by SBA. |
