When the housing bubble burst in 2007, and financial institutions began collapsing at an alarming rate, it was unclear how the sudden meltdown would affect small and large businesses alike. Five years after the onset of what would soon be called the Great Recession, it has become clear that, while the economy is slowly rebounding, many small business owners are still suffering and find getting a small business loan difficult due to tightened lending standards enforced by traditional financial institutions.
According to a DePaul University analysis of the effects of the financial crisis on business, it appears that small businesses may have been hit the hardest during the crisis. What’s more, while the housing market is slowly making gains, mortgage rates are dropping, and big banks are yet again thriving, small businesses continue to struggle.
The report, titled “How did the financial crisis affect small business lending in the United States?” confirmed that the financial plummet in late 2007 and 2008 made obtaining a loan as a small business owner extremely difficult. Entrepreneurs even found that getting a business merchant cash advance became tough when small businesses needed access to working capital more than ever.
Before the U.S. and global economies crashed, banks continually increased lending to small firms from year to year. According to the DePaul study, in June 1994, banks lent $308 billion to small businesses. By the peak of the lending boom in June 2008, banks provided small businesses with $659 billion in financing.
After the “too big to fail” banks were bailed out by the federal government, and despite the necessity for small business loans for companies to stay afloat and boost the fragile economy, lending standards remained rigid. Between June 2008 and June 2011, small business lending dropped by 18 percent to only $543 billion.
Meanwhile, overall lending dropped from $2.14 trillion in June 2008 by 9 percent to $1.96 trillion in June 2011. From this data alone, it is clear that the Great Recession hit small businesses much more significantly than larger organizations. It also resulted in the failure and closure of smaller lending institution such as credit unions. In 2009 alone, the Federal Deposit Insurance Corporation closed more than 100 banks. By 2011, 397 banks across the nation had failed, and 813 banks were on the official FDIC list of troubled institutions, further narrowing the field of available lenders for small businesses.
Continued lack of capital
Several years later, banks have continued to impose tight lending standards, especially on small businesses. While overall small business lending fell by 18 percent from 2008 to 2011, small commercial and industrial suffered even more, falling 20 percent during that same time period.
As a result, small businesses experienced a lack in cash flow, which forced many to permanently close their doors. With fewer customers and a lack of financial capital, small firms continue to struggle across the country. If a small business owner is still having trouble finding access to finances, they can come to an alternative lender like National Funding for help. National Funding can provide guidance on everything from equipment financing to getting a small business loan.