Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments November 7, 2021 erstellt
Description:
Collateral is often viewed as a low-cost mechanism to mitigate external financing frictions. However, we find that firms face a substantial cost to pledge collateral. Exploiting a regulatory quirk of the disaster loan program of the Small Business Administration (SBA), we estimate that the cost of collateral is equivalent to 6%-9% of the loan value for small businesses. The magnitude of the collateral cost depends on the type of the collateral requirements (fixed lien vs. floating lien), business sectors, and collateral laws. Our finding suggests that a pecking order between secured and unsecured borrowing may not hold. Instead, the secured borrowing decision may be best characterized by a trade-off theory. The collateral trade-off has important implications for firms' financing decisions, the financial accelerator mechanism, and the design of government lending programs