Daily News: July 27, 2012

Study: Tap Big Businesses’ Idle Cash to Relieve Credit Crunch


In a new study, released by the TechAmerica Foundation, business expert Andrew Sherman lays out a model to overcome the credit crunch by tapping the idle cash reserves of big businesses, currently estimated at more than $2 trillion.

The study focuses on Rapid Growth Enterprises (RGEs), a special category of small- and medium-sized enterprises (SMEs). SMEs that play an over-sized role in the economy as job creators and economic innovators and are responsible for nearly all of the job growth in the U.S. in recent decades. RGEs tend to be driven by innovation and intangible assets such as high-tech patents and business processes that are not fairly valued, if at all. But with the proper support, many RGEs are positioned to scale up and provide significant job growth for the U.S. economy, according to the study news release.

However, the ongoing credit crunch has dried up traditional sources of credit for RGEs, hampering their growth, Sherman said, citing three main hurdles:

  • Lenders still cling to the traditional requirement of tangible assets, such as cash and real estate, for guaranteeing loans, and banks are cautious with lending. A recent study by the OECD found the credit crunch has been tougher for SMEs than for large companies.

  • The traditional RGE sources of venture capital, private equity, angel investors, and private placements fall short in terms of total dollars and number of deals when compared to 2007 figures.

  • Public sector solutions — such as SBA loan guarantees, stimulus projects, or JOBS Act provisions — have value but are inherently limited, politicized, and not the most promising solution for closing the lending gap.

    Sherman is urging big businesses to use a portion of their more than $2 trillion in idle capital to provide loan guarantees to community banks that lend to RGEs. Standard methodologies and ranking systems could be developed to lower the risk of loans backed by intangible assets, according to Sherman.

    “The United States traditionally offers the best environment for growth for innovative, high-tech startup companies,” said Sherman, a strategic adviser to dozens of companies and partner in the mergers and acquisitions department of law firm Jones Day. “But that record is at risk when promising companies can’t get affordable credit.

    “Meanwhile, Corporate America is sitting on more than $2 trillion in uncommitted cash – a tremendous amount of potential investment capital. A way forward is to create private-sector loan-guarantee funds that could leverage big business resources to jump-start growth among SMEs,” Sherman said.

    “The lending that would flow from such funds could help create a virtuous cycle of growth, partnership, and co-innovation between companies large and small, leading to a stronger, faster-growing economy in the long run,” said Jennifer Kerber, president of the TechAmerica Foundation. “This is particularly important for the technology industry because of the continual creation of new products that require credit to get to market.”

    Robert Cresanti is head of U.S. government relations for the global software company SAP, which underwrote the study. “SAP, as both a vendor to and purchaser from many small and medium-sized enterprises, is very interested in this concept, and we invite our customers and partners to explore it with us,” he said.