The Eurozone Debt Crisis is Starving Small Business of Cash

Posted by PITHOCRATES - January 8th, 2012

Week in Review

As nations borrow themselves into financial crises small businesses suffer (see As chances for bank loans shrink, Britain’s small firms struggle by Henry Chu posted 1/1/2012 on The Los AngelesTimes).

Last month, the European Central Bank surprised many economists with its announcement that it would be doling out a record amount of money in special low-interest three-year loans to the region’s struggling financial institutions. More than 500 banks signed up to borrow a staggering $640 billion, evidence that many are having trouble drumming up cash.

The hope is that they’ll hand out some of their new funds from the ECB as commercial loans and buy up bonds of financially troubled nations such as Italy and Spain. But economists say it’s also likely that many banks will hoard the extra money to beef up their reserves in the event of an emergency.

That would be bad news for business owners whose own reserves are running low and who need the banks to help tide them over, for example, shopkeepers who traditionally require a boost through lean winter months…

The funding freeze is largely caused by the reluctance to lend on the part of Britain’s mainstream banks, such as Barclays and Lloyds. Just five of the big banks account for 85% of the credit extended to small and medium-sized firms, which can’t issue bonds or go directly to financing markets the way big businesses can.

Sales are a funny thing.  They don’t come in equal weekly amounts.  Even if they did customers don’t pay in equal weekly amounts.  Sometimes they pay 90 days after being invoiced.  Not the same with payroll.  Or other business costs.  That do come in equal weekly amounts. And have to be paid weekly.  Which is why business needs to borrow money.  For those times when sales are slow.  And when customers are taking longer to pay.

This is not as big a problem for the big businesses.  Who can sell bonds and have access to other financing.  But for small business, the number one employer in most countries, it’s a big problem.  And it’s a big problem for the economy in general.

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