A friend came into your office and said that his bank was out to kill small businesses. You asked him what he meant by this remark, and he said that he read an article that said his bank had just loaned $10 million to a major automobile manufacturer at a rate of 3 percent, which is less than prime. But your friend just borrowed $50,000 from the same bank and they charged him prime plus four percent, or 7.5 percent. Your friend has been in business for two years, and last year he had a loss of $2,000. How can you explain this difference in interest rate to your friend?
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