For Little Business

Most urgent plea to arise from the Little Businessmen's Conference in Washington last month was for easier credit. Lately the Senate Banking & Currency Committee has been studying ways of providing it. Last week, while a crowd of small businessmen were reiterating their need before the committee, two Government officials appeared, one with the first sound analysis of the problem, the other with a bold remedy.

Vass. Since all new security issues are registered with SEC, it has been the best means of analyzing their success. On the basis of a study of three years' registrations, Lawrence C. Vass, chief of SEC's Investment Banking section, decided that "the problem of financing for small business today is its inability to raise junior-debt and equity capital, rather than an absence of short-term credit." In other words, when a small business wants temporary funds, banks are glad to provide them.* But when a small business wants $500,000 to build a new plant, banks are generally unwilling to take such a long-term risk and the only resort for the business is to try to sell some securities. This presents unique difficulties for small businesses.

Investment bankers generally refuse to underwrite small security issues for the plain reason that the bankers cannot pay the "fixed charges" and still make a worth while commission on the deal. Fixed charges in underwriting are legal fees, accountant fees and cuts to dealers. To gross $50,000, which investment bankers generally consider minimum per deal, the banker would have to charge an exorbitant commission to float a small issue. Said Mr. Vass: "The banker can afford to charge but 2% or 3% on the sale of a $10,000,000 or $20,000,000 issue, while he must charge, say, 8% or 10% on an issue of $500,000 or $1,000,000."

According to Statistics of Income for 1934, 404,610 corporations, 98% of those filing income tax returns, had assets of less than $5,000,000 and 386,000 had assets of less than $1,000,000. Between July 1933 and September 1936 SEC received 483 security registration statements from small companies. Their total requirements amounted to $273,000,000, an average of $565,000 apiece. In only one in four cases was more than 50% of the amount registered actually sold. In 163 cases no securities were sold at all. It seemed apparent to Mr. Vass that small business was not getting the credit it wanted and "the well-being of our economy cannot be divorced from the well-being and prosperity of these small and medium-sized corporations."

Pepper. To provide this missing implement in the U. S. financial tool chest, Senator Claude Pepper of Florida has a bill before the Senate providing for insurance by RFC of bank loans to business for expansion purposes. Last week he appeared before the Senate Banking & Currency Committee to denounce investment bankers and suggest the creation by the Government of national industrial banks to provide capital to small businesses. Said he: "The time has come when the Government must step in and not only afford adequate facilities to business, but break up the grip of the investment banking group upon the money markets of this country."

*If banks will not, RFC will, it announced last fortnight (TIME, March 14)

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