Why Don’t Equity Funds and Large Companies Invest in Small Businesses?

BY busadmin  June 25, 2010 at 4:03 PM EST

Editor’s Note: This post continues a conversation begun yesterday about Paul Solman’s recent report on the small business credit crunch — which included a scene of “chicken chase” that some viewers found upsetting.

Question: I like chickens too and care for the four hens next door when the owners are away. But the report troubled me more because that thriving business could not get a bank loan to expand. It shows how hard the banks are making it for the nation to get back on its feet again. I know, I know, they have their reasons. But it says so much about how hard it will be for college grads as well as 45 yr. olds to get a real new job.

At the same time we are hearing that the equity funds and major corps. such as Apple have billions and billions on stand-by. Why aren’t the funds putting some of that money to work offering loans to triple A businesses? When that one small business suffers many more connected to it suffer too. We all will suffer. The chicken will (likely) survive and lay more eggs.

Paul Solman: Another viewer weighs in on chicken chasing and the credit crunch. I’ve had others make the same point in phone calls or in person, as well as all those who commented to yesterday’s chicken post online. We could have done the story without making fun of a terrorized chicken. But let’s not lose sight of the human fear out there.

SRC’s problem points up another problem of small businesses in general: In a world of gigantic financial entities, it’s not worth their while to fund little fish. I ran into this problem maybe 20 years ago, doing a story for the NewsHour about watermelon farmers in Prairie View, Texas. They grew the biggest melons ever. They were diligent, efficient. But for the mega-chain supermarkets to buy their melons required too many “transactions costs”: accommodating smaller trucks, more individual sellers, less standardized product. The farmers formed a coop — that’s what so many are forced to do. But the economies of scale were still insufficient.

Now Missouri banks must know SRC and its record. But they’re in business to make money for their shareholders. They are terrified of the double-dip recession Paul Krugman and others keep fretting over. (Even conservative economist and obsessive optimist Ed Yardeni now gives it a 30 percent chance of happening, up from just 15 percent not long ago.)

Still, I myself can’t get over the fact that in order to have a line of credit from a bank, SRC has to have that amount of money already on deposit. Talk about running scared!