US small businesses are having to pay more to borrow relative to the Federal Reserve’s benchmark rate than at any time in at least a quarter of a century, according to official data from the central bank.

The data suggest that small businesses – which form the backbone of the US economy – are not receiving the full benefit from the ultra-low rates that are supporting some larger employers.

Securing capital for small businesses – which account for the bulk of job creation –
has been a priority for the Obama administration, which has proposed a $30bn fund to help community and neighbourhood banks increase their lending.

The Fed’s data show that in early May interest rates on small commercial and industrial loans, on average worth about $500,000, were 3½ per cent higher than the federal funds rate, the widest gap since the series began in 1986.

The data are contained in the Fed’s “Terms of Business Lending” survey released at the start of July. It is conducted quarterly and based on a survey of 348 domestically chartered commercial banks and 50 US branches of foreign banks.

With the federal funds rate at record lows, the absolute cost of credit is cheap by historic standards. But the data suggest that banks consider small business a relatively risky bet in an uncertain economy.

Getting credit flowing to small businesses has been difficult for officials to achieve. In April, another Fed survey found that domestic banks were tightening up the terms on commercial loans to smaller companies but other indicators suggest that loan demand has also dropped off.

The Federal Reserve has also identified the issue as a key concern. It slashed interest rates during the downturn, and has kept them low since, in part to encourage banks to pass on low-cost capital to main street companies.

Ken Wuethrich, president of Connext Financial in Indianapolis, which arranges loans of $100,000-$1.5m for manufacturing companies, says those tighter conditions and the
withdrawal of some large industrial lenders from the market has forced some towards even more expensive secondary markets.

“The secondary money is at a premium because nobody wants to let loose the cash,” said Mr Wuethrich. “Rates are 6 to 9 per cent right now in the secondary market, compared to 4 to 6 per cent at commercial banks.

“If I am a small business at the moment, I don’t have any customers so don’t want to buy more inventory. I am not expanding my plant, I don’t need to buy a new truck and I don’t need to hire workers, so I am not asking for a loan, ” said William Dunkelberg, chief economist at the National Federation of Independent Business and Chairman of Liberty Bell Bank.

Mr Dunkelberg says his own bank and many others have introduced floors of about
5 per cent for loans. He argues small banks can’t afford to offer money at cheaper levels because they don’t have access to base rates.

Get alerts on Capital markets when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article