Entrepreneurs pay interest rates as high as 1,000 basis points for one of two reasons: First, default rates are high. (This is not necessarily a difference in expected rates of return.) Second, market imperfections

(especially information differences about default probabilities and liquidity premiums) are high. Banks cannot easily determine which entrepreneurs are for real and which ones will go bankrupt and take the bank’s money with them. The entrepreneurs may or may not be better at knowing whether their inventions will work. (This can be a market imperfection.)