When economic insanity erupted in 2008, the global credit crisis brought the global economy to the brink of a complete collapse. Most Americans are actually a bit unclear as to what exactly happened in 2008 that almost caused the world as we know it to end. Sure, the Subprime Mortgage Market completely imploded. And that caused lots of high-powered financial firms (Fannie & Freddie, Bear Stearns, Lehman Brothers, etc) to fail. But the real killer was what happened in the credit markets.
Now, this may sound insane, but our modern economy actually operates at the highest level by banks exchanging credit in an overnight lending market. Banks fund their day-to-day operations by borrowing and lending to one another. If banks stop lending to one another, the entire global economy collapses. And this is exactly what happened in 2008. Once the Subprime market imploded, banks did not know which other banks were the next to fall, so they all stopped lending to each other in fear that they wouldn’t get paid back. This led to a credit crisis that literally almost destroyed our modern economy.
Now, three and a half full years after the collapse, banks are still hesitant to lend! The U.S. government stepped in the picture in the fall of ’08 in order to prop up failing banks, and this meant that banks wouldn’t fail, which mean that banks started to lend to each other. But the U.S. government didn’t step in to prop up small businesses. Therefore, for the last three and a half years, banks have been very, very hesitant to loan to small businesses for fear of not getting paid back. Banks know they will get paid back from other banks, via the government. But how will they get paid back if Joe’s Plumbing Company goes down? Well, they won’t, and that is why they stopped lending. And merchant account services became more difficult to secure.
Signs of Life
Throughout 2009 and 2010, small business lending was at record lows. Banks were simply not lending. In 2011, that picture started to change. The Obama Administration passed the Recovery Act and the Small Business Jobs Act, which helped the Small Business Administration lend a whopping $30 billion in FY2010.
Just a few weeks ago, on February 29th, the Wall Street Journal published a story titled, At Last! Banks Rev Up Lending. The article cites a report released by the Federal Deposit Insurance Corporation (FDIC), which stated that U.S. banks posted their biggest quarterly increase in lending in four years. That is substantial, and it is a great sign that we are on the path of recovery. Some companies have even been turning to credit card merchants for small businesses that have been adding to low lending rates.
A second key stat in the FDIC report was that loan losses during 2011 fell to their lowest level since early 2008. Now, remember these banks are a bit freaked out of lending to small businesses because of fear they won’t get paid back. Therefore, banks love to see loan losses at multi-year lows. This should continue to bolster risk sentiment among the banking world, and support the continuation of this lending trend. It will also make merchant account services easier to access.
If you have been hesitant to apply for a small business loan over the last few years because you simply saw it as a pointless waste of time, cheer up. Banks are lending again, at least to some degree, and it may be time to finally make a trip to the local community bank and put this recovery to the test.