The global financial crisis that began in 2007/2008 quickly spiralled out of control and resulted in credit markets tightening up around the world. That crisis may be in the rear-view mirror, but the ramifications of it linger to this day. The failure of Lehman Brothers and the subprime mortgage crisis that precipitated the worst recession since 1929 has left a bad taste in the mouths of banks, non-bank lenders and the financial industry overall. For starters, credits markets have tightened considerably since 2008.
Banks that authorized lines of credit to borrowers are not quite as eager as they were. Global financial authorities have slapped a host of capital requirements on banks to prevent them from going belly up in the event of another economic shock. These capital cushions are designed to protect borrowers from banks that may be overextending themselves.
The Federal Reserve Bank acted decisively post crisis to restore calm to the financial markets. One way it did this was cutting interest rates to record low levels. Low interest rates accelerate the velocity flow of money through the economy, encouraging investment and inflation-related pressures. When credit lines dry up, this has a contractionary effect on economic activity. People tend to spend less on big-ticket purchases like vehicles, homes and expensive vacations.
The Fed, Bank of England, European Central Bank, the RBA, and Bank of Japan are among a handful of major authorities that adopted accommodative policies to encourage economic growth and expansion. These central banks went further with a series of asset purchases, which ultimately resulted in a robust economic recovery in the United States, the United Kingdom, Europe and beyond. Japan has struggled with persistently low economic growth, spurred in part by a shrinking labour force and deflationary pressures. The governor of the Bank of Japan, Kuroda, has surprised markets with monetary policy, hoping to reignite the Japanese economy.
Why Are Banks Reluctant to Lend Money?
Now, a decade after the financial crisis, things are still difficult. In the United Kingdom, the spectacular collapse of Northern Rock brought upon a crisis of unimaginable proportions. In the UK, the Bank of England stepped in to reduce interest rates to spur economic activity. Despite that, banks remained reluctant to lend to one another, and tightened the reins on credit approvals.
Things are certainly better today, but there is a great amount of scepticism when it comes to mortgage approvals, big lines of credit, and business loans. Even in an era of historically low interest rates, banks simply do not want to take on the additional risks. The global economy shifted its focus from a heavy reliance on central banks as a mechanism for stabilizing the financial system.
Confidence in central banks evaporated, since monetary policy proved largely impotent in shoring up financial security. We have seen a degree of complacency permeating the banking industry vis-à-vis unsecured loans. In the UK alone it is estimated that £200 billion worth of unsecured loans and automobile loans now exists. At this critical juncture, a rise in interest rates will be detrimental to countries with steadily increasing interest rates. That the BOE, the Fed and the Bank of Canada are moving in that direction is somewhat alarming.
Australian Lenders Fill the Void Left by Banks
The fate of SMEs is critical to the success of a country’s GDP growth. For small businesses, the solution may be found outside of the traditional banking sector. Various non-bank lenders have emerged over the years, in countries like Australia, New Zealand, the US, Canada, the UK and beyond. These lenders offer a variety of services to their clientele, in the form of unsecured business loans.
Small Business Loans Australia companies provide financing to Australian businesses. Banks and traditional credit providers are reluctant to fast track loan applications, for fear that they are risking their own well-being. Multiple small business loan companies have popped up over the years, with loan amounts from as little as $5,000-$400,000. These loan providers offer quick responses to credit applications and they also offer unsecured business loans to clients. Naturally, they are increasingly popular in countries like Australia where banks have turned a blind eye to the needs of the small business community.