Measuring the Default Risk of Small Business Loans: A Survival Analysis Approach

Document Type



Published by Ohio State University Press in the Journal of Money, Credit and Banking, volume 37 issue 5, 2005. Bryant users may access this article here.


small business loans; default risk; survival analysis; hazard models


Ohio State University Press


In this paper we report that, although medium-maturity loans originated under the SBA 7(a) loan guarantee program are targeted to small firms that fail to obtain credit through conventional channels, the default experience is comparable to that of a large percentage of loans held by larger commercial banks. We establish that the default behavior of these loans is time sensitive--as a loan seasons, the likelihood of default increases initially, peaks in the second year, and declines thereafter. Using a discrete-time hazard framework, we show that the likelihood of default is conditional on borrower, lender, and loan characteristics, and changes in economic conditions.