Incrementality of SME Loan Guarantees

Authors: Riding, Allan; Madill, Judith; Haines, George

Source: Small Business Economics, Volume 29, Numbers 1-2, June 2007 , pp. 47-61(15)

Publisher: Springer

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Abstract:

In many countries, loan guarantee programs are important elements of government policy with respect to small- and medium-sized enterprises (SMEs). If loan guarantee schemes are to be effective, a majority of firms obtaining assistance through such a scheme ought not to be able to obtain financing from existing sources: a property known as incrementality or additionality. This paper describes a new approach to measuring incrementality. This work uses a two-stage process to estimate the incrementality of loans made under the terms of the Canada Small Business Financing (CSBF) program. First, a logistic regression-based model of loan outcomes (essentially a credit-scoring model) is estimated based on a large representative sample of SMEs. The resulting model was consistent with prior expectations and exhibited high levels of goodness-of-fit. The model was then employed to classify a sample of firms that had received loans under the terms of the loan guarantee scheme. Incremental loans ought to be classified as “turndowns” by the model; hence the proportion of loan guarantee recipients that the model classified as turndowns is a direct measure of incrementality. For the CSBF loan guarantee program incrementality was estimated (with 95% confidence) as 74.8±9.0%.

Keywords: additionality; incrementality; small business; loan guarantees; G18; G28; M13; O17

Document Type: Research article

DOI: http://dx.doi.org/10.1007/s11187-005-4411-4

Affiliations: 1: Email: al_riding@carleton.ca

Publication date: 2007-06-01