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Fed's Loans Could Help Entrepreneurs

Posted by Dennis Romero | October 8, 2008
URL: http://www.entrepreneur.com/blog/218212
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The U.S. Federal Reserve on Tuesday vowed to buy short-term debt in order to unlock the credit flow that business owners rely on for quick loans, but today it's still not clear exactly when the relief will come or whether the move will indeed trickle down to the everyday entrepreneurs who need help the most.

The buying spree was designed to grease Main Street businesses and to impress the stock market, but so far it has done neither. Under the plan, the fed is vowing to purchase an unspecified amount of quick-turnaround "commercial paper" that's issued by major corporations and financial institutions. It's usually bought by institutional investors, but those big spenders are skittish about backing just about anything these days, including loans and stocks.

The effect has been a constricted credit market, particularly when it comes to the kinds of fast credit lines that entrepreneurs have relied on to cover spikes in expenses--payroll is a good example--when income is steady or declining. Such short-term credit is worth billions of dollars and is due within months if not weeks. But it has started to dry up as investors fret about holding the bag should a company issuing the paper go belly up, as Lehman Brothers did last month.

Sen. Barack Obama addressed the issue at last night's presidential debate in Nashville.

"Right now, the credit markets are frozen up and what that means, as a practical matter, is that small businesses and some large businesses just can't get loans," Obama said. "If they can't get a loan, that means that they can't make payroll. If they can't make payroll, then they may end up having to shut their doors and lay people off."

"And if you imagine just one company trying to deal with that," he said, "now imagine a million companies all across the country. So it could end up having an adverse effect on everybody, and that's why we had to take action. But we shouldn't have been there in the first place."

The Fed hasn't put a cap on the amount of paper it will buy and, to date, hasn't actually bought anything. Some observers think that investors will remain fearful unless they actually see the Fed taking the first step.

Meanwhile, Federal Reserve Chairman Ben S. Bernanke (pictured above) is playing up the short-term credit rescue plan as a boon to business.

"By potentially restricting future flows of credit to households and businesses, the developments in financial markets pose a significant threat to economic growth," he said in a speech yesterday. " ... The expansion of Federal Reserve lending is helping financial firms cope with reduced access to their usual sources of funding."