Banks Have Money to Lend; But Qualified Applicants are not willing to Borrow
The U.S. Treasury has introduced a new program aimed to provide funds to banks that will augment small business lending. This is the State Small Business Credit Initiative.
The program will offer banks in 11 states an accessible fund of $360 million. The states are those that have applied and shown that each dollar they obtain will earn $10 in new private loans.
This is under the presumption that when someone takes a loan, it is spent for someone who puts the money in another bank and repeats the cycle. As a result of this, there is supposedly a $10 growth from new loans for every $1 of new reserves received by banks.
But, there is a big chance for this formula to fail because the rate of borrowing is so low these days. Banks have funds amounting to $1.5 trillion that is resting at the Federal Reserve Bank. This amount is waiting for borrowers who have good credit standing.
The money is a bank loan in which the interest charges decrease as more loans are taken out. This is sort of an incentive for taking more risk. This then leads to loans that banks will not have without cheap Treasury Funds.
The latest reports on the programs’ success show that very little of the 6,000 independent banking institutions have performed in the program. The reason for this is that there are not enough loan applicants despite the availability of sufficient lending money.
The survey conducted by the National Federation of Independent Businesses showed that only 8% of the owners said that they did not obtain the credit they sought for in July; 28% reported that all their needs were met; and a high of 64% expressed that they are not planning to take a loan. 350,000 independent businesses participated in this survey.
In the year 2000, the best economy so far with a high employment rate, had around 5% of credit complaints. This rate is not significantly lower compared to the present time.
A low 4% rate of owners said that their major business challenge is due to financing. Compare this to 23% of businesses attributing their difficulties to low sales and 36% of them to high taxes, red tape and regulation problems.
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Tagged with: business lending • Credit • small business loans
Filed under: Business Loans
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