Tuesday, May 19, 2009

Small Firms Inability to Raise Money

An article in the WSJ today talked about how small firms are not feeling the credit thaw like larger firms are. This brings up a couple of important points. I have said over and over again that solvency issues are never at the beginning of economic downturns but at the end. Well our solvency issues were before the economic downturn really started. This is one reason that I still think we are nowhere near the bottom. Anyway, last fall Wall St. was coming close to blowing up main street. The government did what they did to save Wall St. and hence main street. All this did was delay the decay in main street. I had a post last week about the small banks earnings getting taken up completely by FDIC insurance increases and the impact that would have on lending by the small banks. Well this article sort of bears that out but I think has a bigger point. If the small businesses continue to decline, it will lead to the decline of bigger businesses and hence Wall St. It will come full circle. You can't have cows if you destroy the grass.

Big companies are rushing to issue stocks and bonds to suddenly hungry investors. But credit is still scarce for thousands of mostly smaller companies that rely on bank lending.

U.S. corporations such as Ford Motor Co. and MGM Mirage Inc. raised more than $34 billion by selling stock in the first two weeks of May. At around the same time, Bill Mulrooney, chief financial officer of UniFoil Corp., was setting aside plans to borrow money for new equipment that the company had hoped would boost sales.

"I hear about the credit markets' freeing, but it's clearly not the case for small businesses," Mr. Mulrooney says.

UniFoil, a Fairfield, N.J., packaging maker with about $35 million a year in revenue, has been unsuccessfully shopping since January for a $2 million loan to buy equipment that would allow it to offer new features. J.P. Morgan Chase & Co. and other big banks declined.


Companies with fewer than 500 employees account for more than half the country's nonfarm private gross domestic product and about half of all private-sector employment, according to the U.S. Small Business Administration's Office of Advocacy. They also rely heavily on credit cards and bank loans for financing.

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