A Novel Idea for Putting Sidelined Cash to Work

Jessica SarterBoeFly In The News

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by Andrew J. Sherman (originally published in the Harvard Business Review)  |   8:00 AM September 4, 2012

It is well established that America’s largest companies have been stockpiling cash over the past 24 months at alarming rates. Estimates range from $1.5 trillion to $2.8 trillion depending on who’s counting, but we can all agree, it’s a boatload of cash. And at first blush, who can blame them? With interest rates at historic lows, market volatility, political uncertainty, the European crisis, severe commodity price fluctuations, and other unpredictable market conditions, corporate brands and executives have been understandably inclined to sit on the sidelines.

Even as the large companies are hoarding cash, many small and mid-sized enterprises are still facing significant challenges and hurdles gaining access to the credit markets. Loans to these companies would help chip away at our alarming unemployment rates—and even more troubling underemployment rates—as well as knock down some of the hurdles that these firms face in executing on their business and growth plans.

The challenge for these emerging growth companies is twofold. First, credit standards and lending rates make it generally difficult to access otherwise very attractive capital available at low interest rates. Second, for small and rapid-growth technology companies, the problem is compounded by the fact that, while rich in intangible assets, they typically lack the kind of collateral (equipment, inventory, real estate, etc.) banks require to secure commercial loans.

What if the idle cash sitting in the treasury accounts of our largest companies could be used as collateral to secure these loans?

This idea is more fully explored in a white paper [pdf]  [Andrew J. Sherman] recently authored, the product of a study by the TechAmerica Foundation. It explains how private-sector initiatives such as PEPP (the Private Employment Partners Program developed by Lynn Sullivan and her team at Capital J Partners) can help overcome this credit crunch for rapid-growth enterprises. Essentially, if we created a private-sector stimulus by tapping the idle cash reserves of large companies, thousands of small businesses would gain access to the credit they urgently need.

Standard methodologies and ranking systems would need to be developed to lower the risk of loans backed by intangible assets, but this is a manageable challenge. We are seeing safeguards and screening systems to mitigate default rates being developed by PEPP and Boefly.

Read the full article at Harvard Business Review