Banks Ease Credit To Big Companies, But Leave Out Small Business

In a sign that life may be getting easier for big U.S. corporations, large banks are beginning to make loans more available.

Citing increased competition as an important factor in their decision, banks are starting to ease their standards for lending to big companies, a new survey from the Federal Reserve suggests. But while this may be good news for those at the top of the corporate ladder, it's unclear whether borrowing will lead to new jobs, or whether it will significantly propel the increasingly uneven economic recovery.

Of 57 banks covered in the survey, 30 said they had eased their credit standards or loan terms. But for the most part, this willingness to lend targeted large borrowers. While three banks said they'd eased their standards for lending to small companies, seven said they'd eased up on big borrowers. In every category of loan terms -- size and cost of credit lines, collateral requirements and others -- more banks had eased up for big borrowers than for small ones.

Small businesses seem to have been left out in the cold. While the survey result doesn't necessarily suggest their situation is getting worse, it also doesn't bode well.

"Credit is already so tight," said Michael Rogers, spokesperson for the Small Business Association of Michigan. "Anything that tightens it further is going to hurt small business job-creation."

Indeed, small businesses contribute about 70 percent of the nation's jobs, according to the Obama administration's estimate. As unemployment remains high at 9.4 percent, and as jobs simply do not exist for the majority of unemployed workers, job-creation is a crucial component of the economic recovery.

All business, large and small, depend on bank loans to fund their growth. But big businesses engage in a host of activities -- besides job-creation -- that they can spend their money on.

A full 77 percent of banks that reported an increase in loan demand in the Fed survey said borrowers had an eye toward mergers and acquisitions, the Financial Times notes. While such corporate combinations can win enormous wealth for executives, they don't always create jobs, and they sometimes even cut them.

In recent months, corporations have tended to hoard cash, a defensive position that could come at the expense of job-creation. In the third quarter of last year, U.S. corporations increased their cash holdings by 7.3 percent, setting a new record with $1.9 trillion in liquid assets, according to Federal Reserve data.

Relative to their short-term liabilities, U.S. corporations haven't been sitting on this much cash since 1956.

Comments

[jcaunter]

07:06 AM on 02/03/2011

Your stock photos are getting old and worn out HP. Better have someone hit up the stock photo sites for some new ones.

[iridium53]

01:45 AM on 02/03/2011

Small business left out in the cold?
While Obama and Geithner are running things?

Of course.

[Trepasky]

12:06 PM on 02/02/2011

"A full 77 percent of banks that reported an increase in loan demand in the Fed survey said borrowers had an eye toward mergers and acquisitions, the Financial Times notes. While such corporate combinations can win enormous wealth for executives, they don't always create jobs, and they sometimes even cut them."

I do not know of any merger/acquisition that did not also include 'cost savings' by elimination of duplicate jobs and departments. However, my experience is not 'as broad' as many others/

Business 101 is profit and why incur debt that doesn't also include cost savings? There are some reasons, especially in expanding the breadth of products and additional markets. However, to much diversity causes corporations to loose focus, so most acquisitions/mergers are within their core business and there is 100% chance that HR, Accounting, IT, and other departments that overlap will get timed to 'save money'

[kori77]

09:56 AM on 02/02/2011

David Korten recently posted on his blog: "Why do we tolerate Wall Street’s reckless excess and abuse of power? In part, it is because so many people of influence have bought into the Edmunds fallacy: 'Historically, manufacturing, exporting and direct investment produced prosperity through income creation. Wealth was created when a portion of income was diverted from consumption into investment in buildings, machinery and technological change. Societies accumulated wealth slowly over generations. Now many societies, and indeed the entire world, have learned how to create wealth directly. The new approach requires that a state find ways to increase the market value of its stock of productive assets. [Emphasis in the original.] … An economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.' If you have difficulty understanding "economist speak," it may be because you are in touch with reality."

[librarynupe]

07:21 AM on 02/02/2011

Its true that small business account for the majority of employment in the U.S. but it also accounts for the majority of unemployment. Even before the crisis and resulting recession, small businesses had a life span of less than five years, which means most ventures were not stable investments. Most banks after being careless and risky with money in good times (and which helped to create this mess) are being frugal and smart with money, which is not in the economy's best interest for recovering. Therefore and loan to a large corporation that has a low chance of default is a wiser investment than a small business that has a higher chance. However, the very fact that banks are beginning to loan is a good sign. Plus the corporations will have to spend their horded liquid assets or risk deflation.

[born 2b different]

08:27 AM on 02/02/2011

while i agree that the small business failure rate is high, I think you overstated it.

gaebler.com
The exact failure rate for small businesses is a hotly contested topic in business circles. Some experts believe that publicized failure rates are highly exaggerated, while others stand by their claim that the businesses included in most failure rate estimations only represent the tip of the iceberg.

Even so, most business experts conform to a theory of "thirds": Of all the new business startups, 1/3 eventually turn a profit, 1/3 break even, and 1/3 never leave a negative earnings scenario. According to a study by the U.S. Small Business Association, only 2/3 of all small business startups survive the first two years and less than half make it to four years. With numbers like that, it's no wonder so many would-be entrepreneurs think twice before taking the plunge.

[Ray E Lantz]

04:15 AM on 02/02/2011

Everyone says that small business is the engine that grows the American economy. Unfortunately, it seems, no one wants to put gas in the engine. (Maybe because it's $3.00 a gallon)

[lvdragonlady]

12:59 AM on 02/02/2011

WT? - The BIG companies are NOT the ones that need the money you m.0.r.@ns.
America it is getting real close to time to show those 'big' companies what Americans can do when they put their heads together.

[BigDaddyWow]

12:52 AM on 02/02/2011

It's been well over 2 years now and Americas banks still have not begun to lend. It's a true credit to entrepreneurs and small business that, despite a completely inept stimulus and a dysfunctional banking system they have been able to endure this long.

I wish that our government would have been smarter and would have recognized that even though the banks were given trillions they haven't nor will they ever be a part of the solution. Instead, the Fed keeps pushing money onto their balance sheets and nothing happens. Arrgg....

[Veri]

09:33 PM on 02/02/2011

The banking system is broke. And the potential liabilities for the big banks in Fraudclosure... well, there is not enough money in the world to cover all of that. The bomb that was set off on September 18th at 11 a.m., 2008, proved to be too big. For the banks. For the very wealthiest of individuals in the world.

World War III, a financial war, was declared then when an individual, or group of individuals, acting in concert attacked the financial underpinnings of The United States and World Economy. Reference this:

http://zerohedge.blogspot.com/2009/02/how-world-almost-came-to-end-at-2pm-on.html

The goal was to sink the world economy. Everybody lost. One can even speculate that the person or people responsible for this attack were even harmed.

The goal of The Federal Reserve is to provide Global Finance with the money, to recapitalize them, so that debts are satisfied and the market remains whole. At the cost of all else. You. Me. Main Street. Tunisia. Egypt. Everyone.

Except the very top of the elites who either, 1. Orchestrated the attack and blew themselves up, or 2. Where victims of the attack. This act of war brought to the the forefront the systemic fraud, lies, and corruption that we are experiencing today. The US Government, and the governments of most of The World are desperate to paper over the problems exposed.

Last question. Who orchestrated this? Who has the money to?

[BigDaddyWow]

03:34 PM on 02/03/2011

Thanks. If I thought there was a serious conspiracy (as opposed to an accidental one) I would say it was started by the big firms on Wallstreet. The fact that a couple thousand people made billions and not a single one of these people have lost a dime. No convictions, no nothing. You had Bob Rubin slide in with Clinton and destroy Glass-Steagell. Then you had Hank Paulson batting cleanup. Doesn't take a lot of imagination.

[ahumbleopinion]

10:52 PM on 02/01/2011

My nephew was recently able to get a SBC backed loan to buy a grocery store in a small town in rural Ohio - a very small business loan.

[kamact]

10:03 PM on 02/01/2011

Of course,...but totally unacceptable

[stape45]

09:42 PM on 02/01/2011

Capitalism­: The gift that keeps on taking. :-(

[BBackSoon]

09:08 PM on 02/01/2011

You mean for those businesses that have about a Trillion in cash? Those Businesses?

[schnauzergirl]

01:05 PM on 02/02/2011

Yep. Its often cheaper for them to borrow than use their capital or "savings". The low interest rates they can secure can be less than they would lose from dividends of the money they have holed up in stocks or bonds

[Gingerale]

08:45 PM on 02/01/2011

Time to see http://www.e-tabitha.com/2011/01/blows-against-empire.html

[Arts4u]

07:50 PM on 02/01/2011

'Indeed, small businesses contribute about 70 percent of the nation's jobs.'

How convenient for the banks to ignore them..... they can take back more of their homes now.....

[costellowriter]

07:42 PM on 02/01/2011

Just one more step toward total control. If you can prevent giving credit to small businesses, they will quickly go out of business, and the decline in competition will benefit the corporate machine.

http://socyberty.com/economics/murder-of-the-middle-class/