- America's small businesses are getting squeezed by a harsh credit environment.
- That's reflected in a record gap between short-term loan costs for smaller firms and debt rates for other corporates.
America's small businesses are getting crushed by a credit squeeze.
Borrowing costs for such companies have surged to unprecedented levels - 60% higher - relative to those for larger corporates with moderate credit risk, thanks to the Federal Reserve's interest-rate increases and a tightening of lending standards following this year's banking turmoil.
Jeff Weniger, head of equity strategy at financial-services firm WisdomTree, highlighted an unprecedented gap between the cost of credit for small firms and the rest of the corporate sector.
"This is the widest gap on record. The NFIB small business survey's 9.20% cost of short-term loans is several percentage points higher than the 5.75% yield on the Moody's Seasoned Baa Corporate Bond. The previous record was set in, gulp, 2006," Weniger said in a Tuesday tweet.
A corporate bond is a type of debt instrument where its buyer lends money to the issuing company. In return, firms pay interest on the loan, and repay the value of the bond once it matures.
One of the main reasons for the surge in small businesses' credit costs is the Fed's aggressive monetary tightening. The US central bank has lifted interest rates by 525 basis points since March 2022 in a bid to tame historically high inflation.
Furthermore, banks across the US have tightened lending processes after the collapse of Silicon Valley Bank in March triggered a wave of instability across the sector. That's also making it more difficult for smaller borrowers to access credit.
"Shark Tank" investor Kevin O'Leary has voiced frustration toward the Joe Biden administration for fostering a such high interest-rate environment, which he says is hurting small business while supporting bigger firms.
"Biden's focused only on the big guys. We've got to save small business right now. We have to do everything in our power to make sure they have access to capital," O'Leary previously said in a recent Fox Business interview.