The collapse of the stock market, particularly shares in large financial companies, will have immediate effects on small businesses. Now that it is clear the the government will not help large brokers and banks, they are more likely than ever to hoard the capital that they can get from emergency Fed loans or from the sale of their operations being done to raise money.
Credit has become so tight that even large firms like AIG (AIG) cannot get bridge financing. The huge insurance operation and many other large companies such as GM (GM) present credit risk, but it is certainly no greater than most small businesses.
The fallout from the stock market sell-off and the fear that the credit crisis is getting worse means that most modest-sized companies will not have access to capital. When they do, the costs will be exceedingly high.
The traditional approach to obtaining capital is through small business loans. With analysts such as bankruptcy specialist Wilbur Ross saying that 1,000 more US banks could fail, lending has already dried up.
The less traditional path to getting capital is to use personal credit. That route is becoming substantially more risky. According to The New York Times, a study from the National Small Business Association showed that among 500 businesses polled, "Forty-four percent said they had used cards to meet capital needs in the previous six months. Fifty-seven percent said their card terms had worsened over the last year."
Put less pleasantly, banks are gouging their small business customers because they need the interest for earnings and they know that firms of modest size have nowhere else to go.
It may be a good time for businesses which don’t need capital to survive to take a breather and do some consolidation. Credit is going to get worse.
Douglas A. McIntyre
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
