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Understanding Where Business Finance & Lending in General Has Come From

  • In the early 2,000’s there was a massive push by politicians and government officials to loosen the requirements for the purchase of a home, suddenly there were new home loan products that didn’t need proof of income, practically anyone could buy a house and did indeed buy a house.  You had strippers who had no verifiable income that owned 5 different rental properties.
  • With so much money flowing from the housing sector, several industries followed suit and provided easy financing including home furnishing, auto sales, and soon there was extreme demand from new startup businesses and existing businesses to find money for their businesses.  Everything was easy.
  • The result was that there was a loosening of lending guidelines for businesses also, in particular if your business was 2 years old and your credit was decent you could walk into a bank and as long as you had decent infrastructure for your business then you could easily secure credit lines up to $50,000 at a bank.
  • It wasn’t just banks that loosened their lending criteria in a lot of cases it was the SBA (Small Business Administration) managed by the government also loosened their lending criteria which in turn made it easier for banks to take risks cine they were backstopped by the SBA in case businesses defaulted and didn’t make their payments, At the very least they would get a lot of the money they lent back from the government.
  • So in this environment from about 2002 to 2007 businesses were able to secure a lot of bank financing, of course then when Lehman’s brothers and other huge banking conglomerates like bear Stearns failed and went bankrupt the extreme fear and the house of cards coming tumbling to the ground with a thud scared the shit out of every bank shareholder, at the same time the government had backed a lot of these business loans and housing loans so the losses were just tremendous.
  • Understandably beginning in late 2008 and 2009 the lending sectors tightened up significantly and the easy money was absolutely gone, if you wanted to go in and get a decent sized line of credit without 3 years of business tax returns, forget about it, there was no way you were getting a cent.
  • Economies are often influenced and built upon extremes whereas in the early 2000’s businesses and home buyers that didn’t deserve loans, but still got them due to the extreme risk tolerance that lenders and the government had taken on, the exact opposite began to happen in 2008, 09, 10 and beyond, banks and lenders pulled back on lending and even the best and strongest businesses couldn’t qualify for any type of financing.
  • So at this point the pendulum had swung so far to the other side that the credit markets were frozen, by the time the credit markets began to thaw, the end result was that the majority of small businesses no longer qualified for financing.

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