Personal factors as determinants of the risk rating for SME investment

ABSTRACT

What variables indicate whether a small or medium enterprise (SME) applying for financing from a development bank is a good loan candidate? Structural equation modeling applied to a set of variables can provide the necessary insights. This paper analyzes 407 SMEs that applied for development loans in Pichincha Province, Ecuador. Rather than specific economic/financial quantitative variables often used in credit scoring models, we employed qualitative variables to study creditworthiness. The structural equation methodology can verify whether a client is creditworthy based on company management, product characteristics, and contextual market aspects. Another key contribution is the finding that an entrepreneur's personal/professional traits are the primary determinant for granting this type of loan. The results have theoretical and practical implications that could enhance the limited empirical research in this field to date.

KEYWORDS:

• Development banking
• SMEs
• credit scoring
• project evaluation
• financial indices
• qualitative variables

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 BM is considered a ‘formative’ variable, that is, its indicators do not correlate, it is a composite (model B). It will be verified throughout this article that this detail, together with the fact that it is the variable that most affects the others, will allow us to explain what has more weight in the variable.

Additional information

Funding

The authors are supported by Junta de Extremadura and ‘ERDF (European Regional Development Fund) A way of making Europe’, through the Project GR21049 (author a) and the Project GR21161 (authors b, c and d).