Bank loans to small firms are often offered at relatively high rates. This is partly because of

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Adverse selection is a concept in economics, insurance, and risk management, which refers to a situation where the type or quality of the risk is not known to one of the parties in a transaction, leading to potentially poor decisions. In the context of bank loans to small firms, adverse selection refers to the idea that banks may charge higher interest rates because they have difficulty distinguishing between high-risk and low-risk small businesses. As a result, they charge higher rates to compensate for the increased risk of lending to small firms that might be more likely to default.

Bank Loans to Small Firms Are Often Offered at Relatively