December 10, 2013
Central banks use Quantitative Easing to kick-start growth in the economy. This stimulus impacts the growth of lending, spending, inflation, etc. that can affect all industries. In general, businesses attribute their growth to their marketing and other internal elements without considering external factors. The effects of Quantitative Easing can have a long term impact so it is important that the central bank initiates it correctly to maximize the impact.
What is Quantitative Easing?
Quantitative Easing is an economic monetary policy that is used to increase the money supply by buying securities from the market to promote increased lending by banks. It is hard to determine if Quantitative Easing has worked because it cannot be measured. There are critics on both sides. Some believe that the US economy would have been much worse without Quantitative Easing while others believe that it resulted in negligible returns and high risks. Analysis does show that Quantitative Easing has had some positive effect in the US.
Small Business Lending Environment
For years now, the banks have been steadily decreasing the amount of credit they offer to borrowers due to the economic collapse. The recovery efforts seem to have invigorated small businesses. The Federal Reserve conducted a new survey stating there has been an increase in demand for small business loans or lines of credit in 2013. From 2008 to 2012, the banks had reduced the amount of money they would lend each year to small businesses. Lenders have started to ease the loan costs and credit limits in an effort to retain small business customers as the lenders have increased option in the marketplace.
Small businesses are beginning to take advantage of the better rates and the competition to invest in their business if bank loans are available to them. Businesses are using loans and lines of credit to fund their needs related to inventories, investment in plant, property and equipment and accounts receivable. With economic recovery and Quantitative Easing ongoing, small businesses have seen some incentive to invest in their business.
Although there are banks are offering more loans and credit lines to small business, many small businesses are scared to borrow from banks. Banks are actually crying out for small business owners to borrow money. There are billions of dollars available to be loaned but there is an unprecedented shortage of qualified borrows. Many qualified borrowers are stuck in a “depression” like mindset. They do not see much opportunity for sales growth or job creation at this time of our economic recovery.
Impact of Quantitative Easing on Small Business Lending
Increasing small business lending could have a huge impact on the entire US economy. One way to boost economic recovery efforts is to have thriving small businesses. Prospective business owners can look at the economic marketplace as one with a lot more competition. Banks have been willing to ease their loaning policies and credit limits to some extent in order to attract small businesses that want to reinvest and fund new business ventures.
Quantitative Easing will put more money back into the economy but if banking practices do not change, not much money will end up in small business loans. The FED policy of Quantitative Easing is designed to increase the economy and employment by making loans more available to small businesses, consumers, investors and home buyers which will increase overall spending and employment. Small businesses and new businesses are responsible for approximately half of the private sector employment and two-thirds of all the new hiring in the economy.
Although there has been a significant decline in the percentage of banks that have tightened loans to small businesses, small business loans are still more difficult to acquire than before the recession. The amounts of small business loans continue to decline. The FED’s policies where designed to increase loans to small businesses, not much goes to small businesses.
Currently, banks have $2.3 trillion available to lend to businesses and consumers because of the FED’s Quantitative Easing. This would be great news for small businesses if the banks were actually loaning this money out. The banks are loaning some money to businesses but not very much for small businesses. Some small businesses have turned to peer-to-peer lending but the accesses to these downs is very difficult and is not usually a good option by small businesses that have previously been turned down by banks. Additionally, the government is forcing banks to have an extraordinarily large amount of liquidity using a series of capital restraints. This means that they have to have a larger portion of their capital in cash or cash like investments and that money is not available for lending.
There are a few reasons that Quantitative Easing will not improve the amount of money that is lent to small businesses even though the money is available. First, there are still tight regulatory requires that make it difficult for banks to lend money to small businesses. Second, there is an uncertainty about the economy and debt crisis that forces banks to keep a larger amount of capital reserves. Third, the new tighter regulations has deterred and discouraged small business owners from seeking new loans. Fourth, small business owners have a “depression” style mindset and they do not feel the economy has recovered enough for additional job creation or opportunity.
While the Federal Reserve does not have much control over all of the reasons that the Quantitative Easing program does not provide more lending opportunities to small business, they need to find a way to address the tight regulations that make it difficult for banks to loan money to small businesses. If they do not find a way, the impact of the Quantitative Easing program will be minimal at best. This is very frustrating because many small businesses are in need of loans and the economy is in need of consumer spending. The economy would improve much faster if banks would loan more to small businesses.