In today’s hostile economic environment, access to capital is the primary differentiating factor between those businesses which have been able to expand and gain market share versus those that have experienced enormous drops in revenue. The reason many small businesses have seen their sales and cash flow drop dramatically, many to the point of closing their doors, while many large U.S. corporations have managed to increase sales, open new retail operations, and grow earnings per share is that a small business almost always relies exclusively on traditional commercial bank financing, such as SBA loans and unsecured lines of credit, while large publicly traded corporations have access to the public markets, such as the stock market or bond market, for access to capital.
Prior to the onset of the financial crises of 2008 and the ensuing Great Recession, many of the largest U.S. commercial banks were engaging in an easy money policy and openly lending to small businesses, whose owners had good credit scores and some industry experience. Many of these business loans consisted of unsecured commercial lines of credit and installment loans that required no collateral. These loans were almost always exclusively backed by a personal guaranty from the business owner. This is why good personal credit was all that was required to virtually guarantee a business loan approval.
During this period, thousands of small business owners used these business loans and lines of credit to access the capital they needed to fund working capital needs that included payroll expenses, equipment purchases, maintenance, repairs, marketing, tax obligations, and expansion opportunities. Easy access to these capital resources allowed many small businesses to flourish and to manage cash flow needs as they arose. Yet, many business owners grew overly optimistic and many made aggressive growth forecasts and took on increasingly risky bets.
As a result, many ambitious business owners began to expand their business operations and borrowed heavily from small business loans and lines of credit, with the anticipation of being able to pay back these heavy debt loads through future growth and increased profits. As long as banks maintained this ‘easy money’ policy, asset values continued to rise, consumers continued to spend, and business owners continued to expand through the use of increased leverage. But, eventually, this party, would come to an abrupt ending.
When the financial crisis of 2008 began with the sudden collapse of Lehman Brothers, one of the oldest and most renowned banking institutions on Wall Street, a financial panic and contagion spread throughout the credit markets. The ensuing freeze of the credit markets caused the gears of the U.S. financial system to come to a grinding halt. Banks stopped lending overnight and the sudden lack of easy money which had caused asset values, especially home prices, to increase in recent years, now cause those very same asset values to plummet. As asset values imploded, commercial bank balance sheets deteriorated and stock prices collapsed. The days of easy money had ended. The party was officially over.
In the aftermath of the financial crisis, the Great Recession that followed created a vacuum in the capital markets. The very same commercial banks that had freely and easily lent money to small businesses and small business owners, now suffered from a lack of capital on their balance sheets – one that threatened their very own existence. Almost overnight, many commercial banks closed off further access to business lines of credit and called due the outstanding balances on business loans. Small businesses, which relied on the working capital from these business lines of credit, could no longer meet their cash flow needs and debt obligations. Unable to cope with a sudden and dramatic drop in sales and revenue, many small businesses failed.