Demand for corporate bonds and an ultraloose monetary policy in the U.S. have translated into record-low borrowing costs for large companies. For small businesses, though, getting credit remains plenty difficult.
U.S. corporations issued more than $355 billion in bonds in the third quarter, 32 percent more than in the same period last year, according to data compiled by Bloomberg. Wal-Mart Stores (WMT) sold $5 billion of bonds on Oct. 18, some of them at the lowest interest rates ever, according to Bank of America (BAC). "Larger companies can go to the market, and that market is largely repaired," says Adolfo Laurenti, deputy chief economist at Mesirow Financial, a money manager in Chicago. Smaller companies that don't have access to the bond market "need to go through some intermediary such as banks, [which] have become very risk-averse."
Although some banks have increased credit in recent months, much of that is due to banks buying securities rather than making loans to small businesses. In the 12 months through August, rates on commercial and industrial loans of less than $100,000 climbed to 8.95 percent from 8.45 percent. Meanwhile, banks pared commercial and industrial lending—loans typically used by companies without access to the bond market—by 11.3 percent in the past year, Federal Reserve data show. "A divide has opened between large firms that are able to tap public securities markets and small firms that largely depend on banks," Fed Chairman Ben Bernanke told a gathering of central bankers in August in Jackson Hole, Wyo.
Mel Hodges feels the pain. Last spring he wanted to increase his bank credit line to $40,000 from $25,000 so he could add a sixth employee at Hodges Technologies, his computer business in Easton, Pa. His bank instead said it might cut the line in half. Although he finally persuaded the bank to maintain his line at $25,000, he didn't make the hire and doesn't expect to anytime soon. "It's a great life being in business, but many nights it keeps you up trying to figure out how you're going to make payroll," says Hodges, 55, who uses the credit line to cover salaries when customers are slow to pay their bills.
The reluctance of bankers to offer loans isn't the only reason for the borrowing slowdown. There's also a lack of demand for credit from many small businesses, which are waiting for sales to pick up before expanding, says Robert Seiwert, senior vice-president at the American Bankers Assn. "Economists have indicated that the recession is over," Seiwert says. "But most small business owners haven't seen that recovery in terms of customers walking through the door."
The bottom line: Record-low borrowing costs for the biggest U.S. companies aren't trickling down to their smaller counterparts.