Banking System Gets New Cash But Not For Biz Loans

(MoneyWatch)  Looking to ease the worst financial crisis since the Great Depression, the U.S. Federal Reserve is pumping new dollars into the economy. But that rush of ready cash probably won't translate into waves of new business loans for credit-strapped companies.

For the moment, concerns about the "credit crunch", which has already curtailed business lending, are playing a secondary role to a more vital mission -- restoring investor confidence in the global financial system and knocking out the widespread pessimism that's taken over this week and is prompting many to flee stocks and bonds.

To signal investors that their investments are liquid and safe, the Fed -- and other central banks across the globe -- are infusing nearly $200 billion into the capital markets. This is meant to raise the comfort level of major lenders who now lack confidence in each other's ability to repay loans. As a result, they've slowed their lending to each other via the money markets. On top of that, many banks are so worried that they're opting to keep huge amounts of cash in the vault and wait out the current crisis.

The central banks contend that by infusing more funds in the financial system, banks will loosen up and start doing business with each other again-- thereby easing the immediate liquidity problems. In theory, that should allow panic-stricken investors to breathe easier.

Yet even after this latest crisis of confidence abates, there's little hope that businesses of all sizes and stripes will enjoy greater access and availability to corporate loans -- especially from U.S. banks.

This summer, the Fed pressed banks to tighten up corporate lending requirements. Bankers apparently took that advice to heart, because commercial and industrial loans, along with commercial real estate loans, have been tougher to get this year, according to a research report from Fox-Pitt Kelton Cochran Caronia Waller. The situation likely won't improve next year, either.

Moreover, small businesses are really feeling the pinch. It's always been difficult for entrepreneurs to get a traditional bank loan. Now, it's nearly impossible. As a result, a growing number of small business owners are tapping into their fastest source for cash: credit cards. A recent survey found that 44 percent of small business owners now depend on plastic for their primary funding source, according to the National Small Business Association.
Naturally, demand for new business loans is tapering off as the economy slows. But existing bank customers continue to hunger for commercial loan upgrades, extended lines of credit and, yes, even the occasional real-estate mortgage.

But don't expect this rush of freshly-minted money now entering the banking system to make it any easier to snag a commercial loan.