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News Link • Economy - Economics USA

Banks are yanking the credit card from small business

No one is going to dispute that lending to small firms has contracted because of the economic malaise that we are experiencing. But then where did all those trillions of dollars go that helped to bailout the banking industry? The average American, many who work at small businesses (or did), were under the impression that the taxpayer bailout was designed to provide added liquidity to these business so they could continue to function in the economy. Banks were supposed to distribute the funds intelligently. What has occurred instead is the money aggregated in the hands of the banking sector and they are now using the money to patch up massive holes in their own balance sheet. The contraction of lending to small business has caused a double impact: “As shown in table 3, panel B, in 2003, small firms that used credit cards, on average, charged $3,224 of new business expenses each month. 40 Users of business cards charged an average of $2,983, and users of personal cards on average charged $2,161 a month. Overall, risky firms were somewhat less likely to use cards than less-risky firms in 2003. Risky firms (column 2 of table 3, panel B) charged somewhat less than the less-risky firms (column 3)— $3,163 versus $3,390—in total, and also charged somewhat less on business and on personal cards.” Small businesses spend an average of $3,224 each month on business credit cards for business expenses each month. This includes purchasing hard assets that grow the business or adding to additional inventory. Many smaller businesses operate on floating their credit and usually rely on their business lines to stay afloat. The above contraction is intense and has added to the misery of most average Americans. So you have a direct impact on spending and with actually maintaining employees or growing the workforce.

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