How a Recession Can Affect Your Business Loan Application

A recession can have a double sided affect on your business loan application. Depending on when in the business cycle you are applying, the recession can either help you get a better deal or prevent you from getting financing all together. Applying at the beginning of a recession, when many fear the worst is yet to come, can be a great challenge. Applying when the economy is in recovery, though, can allow you to capture low rates on a business loan before the national prime rate creeps back up.

Business Loan Applications at the Start of a Recession

Most recessions begin with some type of panic. This panic can be caused by a number of factors, but it only becomes a recession when it combines with deeper problems. For example, in 2007 there was a panic over the failure of the mortgage industry in the United States. This panic took root when it was discovered that the banking industry was deeply entrenched in the failing mortgage market. The immediate response to panic, for the most part, is to stop spending and stop lending. For this reason, applying for a loan at the start of a business recession typically will not get you very far. 

Business Loan Applications Mid Recession

After the initial panic phase, a number of lenders will prove to be in a stronger position than they once expected. These lenders will be facing an economy where few banks are making loans and the national prime rate is very low. Since these banks have low amounts of competition and low overhead, they have a tremendous amount of flexibility to work with small businesses of their choice. They will be very choosy in extending loans, and they may charge high interest rates. However, some lenders will begin lending again after the initial panic subsides. 

Business Loan Applications at the End of a Recession

Perhaps the best time to submit a business loan application is toward the end of a recession. When the national prime rate is still low but markets are recovering, lenders see huge opportunity in the market. They will begin accepting riskier applications and requiring less from borrowers up front. Of course, the credit market is typically the last to recover from a recession. It can take years of recovery before the circumstances are right to apply for a loan. However, many businesses will actually get off to a great start because a recession lowered the cost of loans, reduced the number of competitors and otherwise leveled the barriers to entry into an industry. 

Individual Business Factors

At each phase, the ultimate loan options a business has are determined by its credit. A business with great credit and a high amount of assets will be an attractive borrower to any lender during most parts of the business cycle. The businesses most subject to swings in the market are start up companies. It is hardest to get a new business loan application approved when the credit market is not strong on the whole.