American Businesses and Borrowing

Readers Question: I have heard it said that “American businesses are considered, as a whole, borrowers”. What does this mean?

I think it refers to the fact that most American businesses finance investment out of borrowing, rather than saving. Therefore, most of the big American multinationals have a balance sheet with heavy levels of borrowing.

This is because they can easily borrow through selling shares on the stock market. Investors are willing to lend them money in the expectation of higher revenues in the future.

Some of the companies with the biggest levels of borrowing include General Motors. – Their debts are so large they have been at risk of declaring bankruptcy. However, not all companies are indebted; Google are one company who have a lot of spare cash flow. We say they are cash rich. Google is listed on the stock market, but, they could probably buy back all their shares if they wanted to.

Of course, the whole American economy has developed a propensity for borrowing. The US economy has a large current account deficit (Value of imports greater than exports)

Consumers also have a very low savings ratio.

The Government also has a growing fiscal deficit. (Government spending greater than Tax revenues)