The Role of Loan Commitment Terms in Credit Allocation on the UK Small Firms Loan Guarantee Scheme

Abstract

In this paper we provide empirical evidence concerning the nature of loan commitment contracts as reflected by individual loan contract parameters in influencing the size of bank commitments. Specifically, we consider how the quantitative allocation of credit, the loan amount, is affected or altered by changes to other components of the total loan package. By doing so we shed some more light on the types of real world trade-offs that credit constrained firms might face when approaching banks for funds, using the UK governments loan guarantee programme. Our results point at the importance of relationship lending in the UK.

Keywords: loan commitment contracts, credit allocation, loan amount, relationship lending

JEL Classifications: G21, L14, D45