There has been a tremendous amount of talk in the media over the last few years about how small businesses cannot access business credit (loans, lines of credit, working capital advances or business credit cards).
In fact, several small business associations claim that 41 percent of small businesses cannot access business credit or business capital.
I say they are wrong. What they are actually saying is Small business loans they cannot access business credit on the terms they want or in the form they desire.
Clearly, getting a business loan in 2004 through early 2008 was a lot easier than it is now. But, what really happened was that business loan underwriting standards where drop or lessened – allowing individuals and business owners, many of who should not have gotten credit in the first place, to obtain risky loans – loans that were not repaid and could have never been repaid; very similar to what mortgage banks and mortgage brokers did with home loans.
They underwrote risky loans just to collect origination and processing fees then sold those loans off to investors (again collecting additional fees) – holding no risk in the end. What this did was put a lot of unnecessary toxic business credit in the market – loans that should not have ever been made.
Think about it this way. Let’s say that on a scale of 1 to 10 based on a loan difficulty – with 1 being the easiest option of obtaining a business loan. Prior to 2004 – business loans had a number of about 5. They were not easy to get or hard to get. Banks just followed standard loan underwriting protocols. Thus, those who should get business loans did and those who shouldn’t – didn’t. At that time, underwriting was based on costs of funds and risk of repayment.
But, when congress open the secondary market for these loans (just like they did for secondary home mortgage loans with Fannie and Freddie) – banks realized that they could quickly collect underwriting fees then pass off those loans without assuming any risk. Based on this (just like with the housing market) – they lowered their underwriting standards (why not as they had no risk – it was all up side for them). Thus, the difficulty number for business loans dropped from 5 all the way to 1 (where anyone could get a business loan regardless if they qualified or not).