How a Recession Can Affect Your Business Loan Application

Your business loan application will meet tougher scrutiny in a recession. There are number of factors making it more difficult to achieve business financing during a slow economy. At the same time, there are incentives to take loans and expand your business that can make this financing less expensive if your qualify. Ultimately, a recession creates a lot of opportunity for small businesses to expand and innovate if they can secure the right funding to do so.

National Prime Interest Rates

During a recession, the Federal Reserve will typically drop the prime interest rate banks charge one another. The Fed does this to curb inflation and to encourage lending for both commercial and personal borrowers. Banks will be able to gain access to funding at a lower expense than they would in a booming economy. Some of these savings will be passed on to you in the form of potentially lower interest rates. If your business loan application shows you have a strong financial history, you may qualify for a lower rate than you would during a time of high prosperity. 

Government Incentive Programs

The federal or state governments also encourage small businesses to grow and thrive during a recession. Most economists and politicians agree that small businesses can drive change in a down economy. Depending on the specific programs available at the time you are looking for a loan, you may have an easier time getting your business loan application approved. The government issues incentives through organizations like the Farm Service Agency and Small Business Administration. These federal organizations promise to reimburse private lenders if a borrower defaults. If you qualify for a government secured loan, you will have a good chance at getting your commercial loan application accepted with a private lender. 

Less Loans Available

Even though there are some factors making loans easier to secure and cheaper in a recession, there are just as many factors pushing the effort in the opposite direction. Banks and lenders are short on cash in a recession. This happens because other borrowers default on loans; financial institutions are also heavily-invested in the market and lose money when the market slumps. When lenders have less money, they make fewer loans. This means your business will be competing with others for a smaller amount of total loans available. You will have to stand out from those other borrowers in order to get financing. If you have a bad credit history, you will have a difficult time getting approval when compared to financially-sound companies.

Lower Appetite for Risk

In a time of economic prosperity, lenders often make riskier loans. These loans can pay off when borrowers pay them back at high interest rates. However, loans default in a record number during a recession. Lenders start shying away from risky loans as a result. If you are a high risk borrower, your loan application will be unappealing in a recession. You will likely have to seek out high risk loan programs that are very costly for your business to secure the financing it needs.