Glenn Otto, associate professor of the School of Economics at UNSW Australia Business School says the threat of a credit crunch for small business funding is real. A large percentage of SME (small-to-medium enterprise) finance comes via bank lending, Otto says. Corporates have other sources of operating funds, but SMEs do not. Therefore, if there was a tightening of rules around lending to small businesses, they wouldnt have many outside options. That could have a significant effect on these enterprises.

To reduce their lending risk, briefly outline:

i. two conditions which commercial banks should include in their loan agreements with SMEs.

ii. the specific agency problems that each condition in (i) above is designed to reduce.