Business Credit Availability - Key to Economic Recovery

The conversation within the business community has started to shift and the pressure on the economy has started to shift with it. The question now is what it will take to get the economy growing enough to provide those jobs and get the consumer back into a spending mood.

Analysis: The primary issue as far as business is concerned has become the availability of credit.

Large corporations have not had to contend with this issue to the same degree as the small business person has. The big companies have been able to access the corporate bond market and the equity markets to some extent. But for the vast majority of small and medium size companies, these avenues for financing are not open to them. They rely on banks and the financing options provided by those who purchase their goods and service. By most accounts this money has become much harder to get due to the fact that banks and other lenders have entered a new phase of activity.

Lending has dropped by 7.4% in the last year, the steepest decline in loan activity for business registered since 1942. The amount of money that has been taken off the table is over $700 billion. This is more than twice the amount that the stimulus package has managed to put into the economy thus far. Even if the complete package had been pushed into the economy it would have only matched what the banks have taken out of the economy due to the new trend towards caution.

The key issue in all this is that the engine of employment in the US is small business. The estimates vary from one study to the next but the consensus view is that businesses that employ less than 100 people provided 45% of the new jobs since 1992. These are the very companies that are struggling to get access to credit now. The implication for the 8.3 million people looking for work is pretty apparent. If these companies can’t get money to expand they can’t meet new market demand and they can’t hire anybody. There are many reasons for the dearth of credit and it is true that as the economy improves the atmosphere for lending will improve, but not in the short term.

The first rationale for bank caution is that many are still licking their wounds from the collapse. These are the banks that became too exposed to the building boom or who were lending in communities that were the hardest hit by the recession. They have far too much in the way of non-performing loans and have to take steps to get their affairs in order. They are now risk averse and they have regulators breathing down their necks.

A second rationale is that banks are facing much stricter regulations in the future although today they don’t have a clue what these will amount to. In this atmosphere the banks have to assume the worst and they look at every piece of legislation and every new regulation as another requirement. The mood in Congress is overtly hostile and the regulatory authorities are trying to make up for their errors in the past by becoming far tougher and more aggressive. Even healthy banks have adopted a much more cautious position as they do not know what will be coming down the pike in the weeks and months ahead.

The third rationale is part of the Catch-22 of bank activity. The banks have become cautious and risk averse and they do not want to add more exposure to their already weakened balance sheets. They have no desire to lend to companies whose survival is at all in question and this means they will be taking a very hard line position on a company’s prospects.

If the company needs money to expand and meet competitive and market pressures to grow and survive, the bank is worried. But given that the bank loan is what is needed to address these expansion issue the business is trapped. It needs the money to show progress but it has to show progress before it can get the money. The banks are not willing to get engaged with companies where there is any risk at all of default. That slams the door shut on millions of businesses.
– ARMADA Corporate Intelligence March 12, 2010