Risk sharing, SMEs’ financial strategy, and lending guarantee technology

Several governments use the Credit Guarantee Schemes to ease SMEs' access to funding and support their growth and survival. This paper suggests a lending guarantee technology based on risk sharing through a de facto shareholding agreement to cover potential losses and reduce the premature default risk. The simulation of a typical entrepreneurial experiment shows that the key SMEs dynamics (value creation, profitability, risk, leverage, and equity multiplier, among others) and other related financial additionality and sustainability indicators are substantially improved. The ideal financial strategy for the SMEs' entrepreneurs is to keep lower levels of the equity multiplier to transmit positive signals to the market, which improves the business prospects and related creditworthiness. The results indicate that risk sharing alleviates the financiers' reluctance to increase the SMEs funding and improve their risk management systems.