Small business loans in middle-income countries are priced based on the owner’s personal biography rather than the company’s actual financial health.
Banks often charge small and medium enterprises higher interest rates even when their balance sheets look better than large corporations. Lenders treat these firms as extensions of the individual manager instead of independent corporate entities. This creates a fundamental divide where the person's history matters more than the business's profit margins. Regular entrepreneurs face higher borrowing costs because they cannot escape the manager-priced regime. Financial numbers that would win a low rate for a big firm fail to do the same for a smaller one.
Two Contracts, Not Two Firms: The Manager-Priced SME Credit Contract in a Middle-Income Economy
SSRN · 6727118
Why does the bank charge more when the numbers look better? Chilean small and medium-sized firms borrow less than large firms-a 39 percent debt-to-assets ratio against 55, and a 46 percent short-term-debt-to-sales ratio against 83-and present managers who are slightly older and more experienced than their large-firm counterparts (53.5 years against 51.1; 23 years of experience against 20). They pay, on the same data, an effective lending rate of approximately 6.2 percent against 4.4 percent for