Elon Musk’s bank loans show the gap in US funding

As a matter of business, it’s easy to see why banks agreed to give Elon Musk $25.5 billion in loans in exchange for his Twitter takeover bid. With hundreds of billions of dollars in stocks and possibly some cryptocurrency like dogecoin in reserve, the Tesla founder is a creditworthy fellow. As a serial entrepreneur, he will also be paying significant fees for financial services in the coming years.

However, there is something shocking about what just happened. The red carpet that Musk has opened on Wall Street contrasts with the roadblocks that entrepreneurs with more modest means face when seeking bank loans — and points to the growing gap between credit and have-nots in the American business community.

Banks, of course, were not social welfare organizations. But they have steadily moved away from high street business lending in recent years as the merger transformed the shape of American banks. Smaller community lenders declined while a handful of large banks built trillions of dollars in balance sheets. Economies of scale have become the holy grail of industry, and the little guy in the business world is starting to get lost in the shuffle.

Beth Buford, vice president of strategy at Calvert Impact Capital, a nonprofit group that works with private lenders and local governments to develop market mechanisms that would make credit available — and less expensive — for small businesses, particularly in minority communities.

“Day after day, we see small business owners who are just heroes,” she says. “They do everything for their business and their employees, and all they ask for is a fair shot, just access to the same tools that Elon Musk has. Oftentimes, it’s not available. It is an example of a financial system that is set up to serve very few people well. And it’s all scale driven.”

Changes in lending practices were particularly evident in the years following the financial crisis. Bank lending has increased to larger companies, but not to small ones, according to statistics compiled by Rebel Cole, a former Federal Reserve economist who is now a finance professor at Florida Atlantic University. According to his statistics, the total balance of commercial loans in excess of $1 million in US banks increased from $1.44 trillion in 2010 to $2.75 trillion in 2019 (the last year before the data skewed due to the pandemic). By contrast, total loans under $1 million fell from $652 billion to $645 billion.

Businesses seeking small loans are hardest hit. Cole says the fixed cost of setting up a business loan in the United States can run anywhere from $10,000 to $15,000, making loans under $100,000 or even $200,000 uneconomical for many banks. This result is that small entrepreneurs often have to take advantage of high-cost sources of financing ranging from credit cards to products known as merchant cash advances, which sometimes carry annual percentage rates of up to three digits, industry sources say.

By contrast, the wealthy could actually live on bank loans, borrowing against their holdings of shares to avoid declaring income and subjecting themselves to the same taxes as the paying masses. The terms are attractive, too; Just last year the Financial Times reported that the wealth management arms of major US banks were offering two-year loans against liquid assets such as stocks at an interest rate of around 1.4 per cent.

Musk is leveraging his stock holdings to help fund his $44 billion purchase of Twitter. Nearly half of his $25.5 billion in debt in the deal — $12.5 billion — is secured by Tesla stock. In the popular imagination, margin loans of this type are risky, as stocks can go down as well as up. But today’s banks are happy to lend against such assets. “Stocks are cash equivalents,” Cole says. What is easier to convert to cash than cash?

The question is how many giant margin loans are too many for us. Keeping Musk happy distracts attention – and money – from other needs. Perhaps the bankers who were stumbling on themselves to arrange financing for his Twitter show were too busy to support any new supply chains or deliver on their promises to help communities of color.

Perhaps it is time for policymakers to encourage US lenders to expand their horizons. I hesitate to make an optimistic note in the current political environment, but I bet there are people on both the left and the right who would like credit to be more widely available to qualified borrowers.

Ask yourself: Is the national interest better served by helping the actual Elon Musk get richer – or finding a new Elon Musks? Feel free to tweet your response.

gary.silverman@ft.com

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