Small business lending doesn’t exist in a bubble, which means that when you are trying to get a loan, financial institutions aren’t just taking your business into account. In reality, loans are affected by a number of forces that you should be aware of before trying to secure your financing. These are four economic factors that affect small business lending.
First, interest rates have a great effect on small business lending. As you may know, interest rates are the amount that banks and other financial institutions charge when you borrow money. When the economy is doing well, the Federal Reserve will raise interest rates in order to regulate inflation and also to encourage continued investment. However, raising interest rates mean that financial institutions will also begin to raise interest rates on their loans, which, in turn, affects small business loaning.
The Regulatory Environment
The regulatory environment, or the set of rules and laws that govern businesses, also play a role in loans and lending services. Banks are obligated by law to adhere to lending rules when giving out loans. Recently, there has been a change in the accounting standards that banks and credit unions use to give out loans. One of these is new CECL standards that require financial institutions to estimate current and expected losses for the life of a loan. Basically, CECL changes the way lenders account for debt assets on their books in order to help prevent another financial meltdown like 2008.
Employment numbers also have an effect on small business lending. When the unemployment rate is low, that means that people are working, which means that they are also out spending money. When consumers are spending, that is good news for small businesses. This high growth makes it easier for businesses to get loans with good interest rates. However, when unemployment is high, the opposite is true.
Last and similarly to employment numbers, consumer confidence affects loans and lending. Consumer confidence is basically a measure of how people feel about the economy and the country. When there is high consumer confidence, people are more likely to spend money. That means that there are more opportunities for businesses to get into successful markets and to even create their own, which means that financial institutions are more willing to invest in small business lending. Economic factors that affect small business lending that you should be aware of include interest rates, the regulatory environment, employment numbers, and consumer confidence. Pay attention to these factors as you consider getting or maintaining your own small business loan.
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