Similar to credit guarantees, direct lending by government financial institutions plays a role in bearing firms’ credit risk that private financial institutions cannot assume. Using loan-level information of the Japan Finance Corporation's Small and Medium Enterprise Business Unit we conduct an analysis on the determinants and effects of such lending. Regarding the determinants we find that: (1) JFC loans are used by SMEs with high profitability and growth potential but low capital adequacy ratios and thus the government sector bears the credit risk of firms through these JFC loans; and (2) the degree of risk-bearing by government financial institutions through direct lending increases during recessions. Regarding the effects of direct lending we find that: (1) the financing environment has improved for firms using JFC loans, and the phenomenon observed in Chapter 6 , in which an increase in loans backed by credit guarantees is offset by a decrease in non-guaranteed loans, is unlikely to occur between JFC loans and loans extended by other financial institutions; (2) tangible fixed assets tend to increase more in JFC loan user firms, and they are more active in capital investment; and (3) the ex-post performance of JFC loan user firms does not improve.