Small Business Economics

, Volume 37, Issue 2, pp 205–218 | Cite as

Evaluating guarantee fees for loans to small and medium-sized enterprises

  • Chau-Jung Kuo
  • Chin-Ming Chen
  • Chao-Hsien Sung


Governments all over the world regard loan guarantee schemes (LGS) as one of the most regularly used and relatively effective mechanisms to support small and medium-sized enterprises (SMEs) financially by facilitating their access to debt capital. Due to its nature of involving implicit indirect subsidization, a LGS is mostly evaluated in terms of the economic and social benefits created, such as generation of export revenues and creation of employment opportunities. Although most government-sponsored programs do not set up clear-cut definitions for how to evaluate those benefits and what targets should be achieved, they do have an initial aim of self-financing. Since guarantee fees (premiums) represent the largest cash inflow for a guarantor and the most critical index to indicate a borrower’s credit status, this paper proposes a methodology that specifically aims for this self-financing target by meeting at least default costs with income from premiums. This is done by actuarially determining a guarantee fee for each loan based on market-based information and risk-neutrality concepts. Empirical evidence shows that real cash outflows (costs of honoring defaults) are very close to estimated cash inflows (total guarantee fees), which indicates that the objective of meeting budget constraints is achieved.


Credit guarantee Market-based Risk neutral Actuarial pricing theory 

JEL Classifications

G21 C51 C61 L26 



The authors wish to thank the anonymous reviewers and those who contributed to the discussion of the drafts. The authors gratefully acknowledge the support of the National Science Council of Taiwan under grant no. NSC 95-2416-H-110-022. All shortcomings remain the responsibility of the authors.


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Copyright information

© Springer Science+Business Media, LLC. 2009

Authors and Affiliations

  • Chau-Jung Kuo
    • 1
  • Chin-Ming Chen
    • 2
  • Chao-Hsien Sung
    • 3
  1. 1.Department of FinanceNational Sun Yat-sen UniversityKaohsiungTaiwan, ROC
  2. 2.Department of Money and BankingNational Kaohsiung First University of Science and TechnologyKaohsiungTaiwan, ROC
  3. 3.Department of FinanceNational Sun Yat-sen UniversityKaohsiungTaiwan, ROC

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