Difficulties in Borrowing Continues for Small & Medium Businesses

Written on November 4, 2010 – 10:18 pm | by Ashley Johnson

Borrowing costs of large companies have plunged in recent times in the wake of increase in corporate bond demand and a more lenient monetary policy of the U.S. But, getting credit still remains really difficult for some businesses.

In this year’s third quarter, U.S. Corporations issued $355 billion in bonds. Data compiled by Bloomberg reveals that the issuance is 32 percent greater in comparison to the same period last year. $5 billion of bonds got sold at the minimum interest rate possible. Larger companies can go to markets directly whereas smaller companies need some intermediaries like banks that are risk-averse.

In recent times, banks have increased buying of securities than granting loans to smaller businesses. Rates of commercial industrial loans that remained less than $100,000 soared to 8.95 percent from a low of 8.45 percent, in last 12 months. But Federal Reserve data also reveals that loans granted by banks to companies have been cut by 11.3 percent in the last one year.

Ben Bernanke, Fed Chairman, comments, “A divide has opened between large firms that are able to tap public securities markets and small firms that largely depend on banks.”

Mel Hodges has faced the brunt of it. He thought of adding a sixth employee at the Hodges Technologies and so applied to his bank for an increase in credit line to $40,000 from $25,000. But the bank instead backfired saying that his credit line may be cut to half. He, however, managed to maintain it at the present $ 25,000. He didn’t hire and doesn’t expect to in near future.

The borrowing slowdown is not just because of bankers’ unwillingness to grant loans. The demand for credit has also fallen as small businesses are still waiting for expansion in sales and real turn-over. Robert Seiwert, vice-president at American Bankers Assn., says, “Most small business owners haven’t seen that recovery in terms of customers walking through the door.”

Perfect Business!