Does a Slow Economy Affect Commercial Loan Lending Practices?

Many consumers make the mistake of assuming they are immune to the effects of a slow economy on personal and commercial loan lending practices. It is true that those individuals with good credit scores are less affected, but all loans see the effects of a recession. Those individuals and companies with bad credit may have a particularly difficult time securing a commercial loan at a good interest rate. However, there are many factors that trend in the opposite direction as well.

Tight Credit Markets

One factor making commercial loans harder to come by in a recession is the lack of liquidity in the marketplace. Liquidity describes the amount of cash actually available to banks and lenders. Without this cash, the lenders cannot extend commercial loans, regardless of your credit. In times of tight liquidity, such as a recession, there are fewer loans to apply for. This means borrowers will have more competition when seeking a loan. Applications and credit scores will become increasingly important with fewer loans on the market. 

High Degree of Default

Borrowers default on loans during recessions. As people lose jobs, they may default on mortgages and personal loans. As businesses fail, they will default on small business loans or business lines of credit. The result is banks and lenders become less risky. They want more secure loans, often asking for collateral, and have higher standards for required credit scores. A bankruptcy or default on your record may disqualify you all together. The terms of a commercial loan will be less favorable to the borrower who now has fewer options and less power to negotiate. 

Lower National Interest Rates

Interest rates set by the Federal Reserve tend to go down during a recession. The Fed takes these steps in order to curb inflation and in an attempt to introduce some liquidity to the market. The reasons for exact interest rate decisions are complicated, but the result is usually easier access to loans at a lower rate. This slightly counteracts the other factors making loans less available. The Fed attempts to institute a strong enough force in the opposite direction to allow banks to start lending again. You may benefit from taking a loan when the national interest rate is very low. In fact, some of the most profitable real estate deals occur during a recession because the mortgage loan rates are very low in comparison to times of economic boom.

Federal Programs

The government does not sit by and watch as the country slips into recession. Rather, the government introduces special programs to entice businesses and individual consumers alike to start making large purchases and taking out loans. Depending on the severity of the recession, the government may take large or small steps. In the housing recession of 2007-2009, the government made purchasing new cars and homes cheaper by offering cash-back and tax rebates for these actions. Researching federal programs designed to stimulate commercial loans can open up doors for borrowers to achieve financing at favorable interest rates.