Financial History: How Recessions Affect Small Business Loans
- August 6, 2019
- By Aidan Dwyer
After the Market Crash of 2008, the U.S Economy entered into a recession period, resulting in many hurt industries. One of the largest industries hurt was the business lending industry. Specifically, companies that lend to small and medium-sized businesses.Â
According to the Small Business Administration (SBA), between 2007 and 2011. The number of loans given to small businesses dropped 13%, from 24.5 million to 21.3 million. The average value of loans also dropped 6.7%, while the value of smaller loans (loans less than $1 million) shrank even more substantially, seeing a 19% decrease in value.Â
What Caused the Decrease in Lending?
We can not blame one thing for the decrease in the average size of loans and the total amount of loans given. It is rather a reaction to multiple issues. The decline in the amount lent can be attributed to banks making fewer loans. The huge decline in the amount lent by banks can attribute to the Federal Reserve cutting rates. Generally, in a healthy economy, Federal interest rates are anywhere between 2% and 5%. But in December of 2008 the Fed lowered its rates for the 10th time in under a year to 0.25%. With interest rates at essentially 0 percent return, there was almost no incentive for banks to lend out money. Especially, during a total economic recession period. A time when many of the businesses seeking funding were not necessarily in a financial position to pay back loans. Small businesses suffered great impact by the recession.
Given the housing market crash, the commercial real estate market also took a significant hit. This resulted in the number of commercial real estate loans dropping 39% between 2007 and 2011. While the average value of those loans dropped 17%. The drop in the number of commercial real estate loans accounted for a significant portion of the total drop of small business loans. But the entire business market was affected. Lending was down in both average amount and number of loans, taking years to recover.
Business Lending Today
The good news for small business owners who may be looking into acquiring financing is that the business lending market has improved. Lenders are more willing to provide loans as Federal Interest rates have moved back into the economic sweet spot between 2% and 5%. The average size of loans has increased to $633,000 in 2019, compared to $337,000 in 2012. This increase in loan size bodes well for borrowers in the market for a loan. It means that lenders, both traditional and alternative have increased the amount of money that they are willing to lend out. This also means that more businesses are getting approval for loans than they were in the years following the recession.Â
If you are a business owner and believe that business financing is right for your business, the time to apply is now. Federal interest rates are holding steady for now. But, the U.S economy is overdue for a recession which would start the cycle over again. At REIL Capital, we work hard to get your business the best financing options possible. If you want to see what type of business financing options your business qualifies for, fill out our commitment free application today.Â