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An incentive for better quality customers to leave in search of lower borrowing costs while the poorer quality customers remain.
Reference to the distribution of information between borrower and lender being unfavourable to the borrower.
Can occur in loan markets where the point of market equilibrium involves demand being greater than supply and credit having to be rationed.
Consequences of information asymmetries between borrowers and lenders.
First Way Out
(Normally) the cashflow from the borrower's operations.
Easy to quantify and communicate.
Indicator (Prime) Lending Rate
Rate used to quantify the cost of funds to the lending institution.
Lending to any small business borrower is usually done at a margin over the indicator rate.
The margin reflects credit risks involved.
Collateral for a loan
Small business lenders favour residential securities.
Measure of the ability of a business to manage its liquidity via movements in current assets and current liabilities.
Australian Bureau of Statistics - Fewer than 20 employees
RBA - Has loans of less than $500,000
Small Proprietary Company
Not required to provide detailed financial statements (most small businesses)
Difficult to quantify, substantiate and communicate.
(Information about the borrower's character)
A reference to debtors, creditors and stock in the balance sheet as they are relatively easy to manipulate.
Specialised Risks with Lending to Small Business (!!!)
Key person risk
Lack of capital
Lack of a track record
Poor quality of accounting information
Risks and small business failure
Poor Quality of Accounting Information (!!!)
Delays in the preparation of financial advice
Emphasis on taxation
Reporting freedoms for a small proprietary company