Posted 2 years ago on March 19, 2016, 8:38 a.m. EST by TonyWAWA
This content is user submitted and not an official statement
This might seem like a boring topic, but it is the most important thing you need to understand if you care about an economic recovery in the United States.
Big business loans are interest-only, meaning no principal reduction is required. The loans are based on LIBOR (which is referred to as a "benchmark rate"). The 1-month LIBOR rate is currently .44%. A big business typically pays a low spread over the LIBOR benchmark rate. For the purposes of this example we will use a spread of 1%. So, big business' interest rate is 1.44% and its loan payments are interest-only. When a big business borrows money to make a $1 million investment it only costs them $14,400 per year.
Small business loans - which are guaranteed by the US government - are based on the Prime (benchmark) rate and are fully-amortizing, typically over 5 years. The Prime rate is currently 3.5%. Small business pays a higher spread over the benchmark rate than big business (despite the loans being guaranteed by the US government). For the purposes of this example we will use a spread of 2%. So when a small business borrows money to make an investment it pays 5.5%, fully-amortizing over 5 years. The same $1 million investment costs that small business $229,212 per year, 16 times more than big business.
The debt constant (annual payment/loan amount) for a small business loan is 23%. So, in order for a small business to be able to borrow money it needs to find an opportunity that produces cash flow in excess of 23%, or else it will lose money for 5 years (and likely go bankrupt). There are very few opportunities like that in today's economy.
A big business only needs to find opportunities that produce cash flow in excess of 1.44%. Obviously, most existing investment and business opportunities qualify.
Moreover, US government-backed small business loans forbid small businesses from engaging in "financial" or "rent extracting" activities, which are the most stable and profitable businesses. There are also restrictions on small businesses engaging in international trade. Big business loans do not have any of these restrictions.
Big business is not smarter or more efficient than small business. They just have a lower cost of capital and a wider scope of available business activities. This is a result of big businesses' lobbyists influencing Congress to keep small business loans uncompetitive.
Given this dynamic, small business investment is near-impossible, and big business consolidation is inevitable. There are fewer and fewer companies cornering more and more markets. The result is the corporate oligarchy that exists in America today. There was an interesting statistic released recently. The US has fewer corporations than it had 40 years ago, despite there being three times as many citizens.
If corporations are people, do we just need more people?
The only way this is going to change is if the "people" lobby Congress to alter the terms of small business loans (which are governed by the Small Business Administration) to make them competitive with big business loans.
This inequality in the cost of capital is the cornerstone of the current corporate oligarchy. Small businesses are the backbone of America. Small businesses have created far more wealth and high-paying jobs for Americans than big business and the government combined. Today, small business is dying.
The only way to save the economic heart of the American economy is to change the lending inequality between small and big businesses. Otherwise, America will never become great again.