After the devastating financial crisis of 2008, you would think the financial industry had learned its lesson. However, just a decade after reckless home lending habits nearly destroyed the financial system, risky loans are back in full force. This time, banks are not the ones to blame.
In the years following the recession, a growing network of businesses stepped in to provide alternative loan options to the parts of the economy banks had quickly abandoned. This is known as “shadow banking”. With banks unwilling to lend, it made it incredibly difficult – and still does – for many individuals and business owners to secure the funding they need for many areas of life and business. These alternative financial sources sought to solve this problem.
Shadow banking has become a key source of the credit that drives the American economy. To put things in perspective, with nearly $15 trillion in assets, the shadow-banking sector in the U.S. is roughly the same as the entire banking system of Britain – the world’s fifth-largest economy. In fact, shadow banks have eclipsed traditional banks in certain areas: mortgages, auto lending and some business loans.
The New, Big Problem
These new and untested players, some backed by Wall Street, might seem like a win for some. But new problems have risen from the industry leaning on lenders that compete aggressively, bypass the traditional and regulated banking system, and operate with less of a cushion against losses. A collection of industry officials and policymakers are now warning that they’re watching an even riskier lending situation by these non-banks.
“We decided to regulate the banks, hoping for a more stable financial system, which doesn’t take as many risks,” said Amit Seru, a professor of finance at the Stanford Graduate School of Business. “Where the banks retreated, shadow banks stepped in.”
Mortgages and Risky Loans
The American mortgage market is the largest source of consumer lending on earth. Today, the source of the lending comes from companies like Quicken Loans and loanDepot. Between 2009 and 2018 alone, the share of mortgage loans from these businesses and others jumped from 9 percent to more than 52 percent. This is great if you are searching for a loan. But bad news if these companies do not keep enough of a cushion of capital and there is a slide in the economy and the housing market.
Likewise, there is an alternative for small and midsize companies that struggle to secure funding from banks called Business Development Companies, or B.D.C.s. Essentially a kind of investment fund, they appeal to investors because of the high interest rates they charge. While they can supercharge returns during good times, it can also make losses that much worse when things take a downturn.
Where to Find Flexible Funding?
If your small business is one of the many that struggles to find funding – and you want to avoid risky options – consider the advantages of a high risk business loan from a provider like First American Merchant. As a reputable, high risk specialist, First American Merchant has years of experience in providing flexible funding options that help businesses grow and thrive. The setup process is known for being fast, simple and hassle-free, and you can have money in your business bank account in as little as 24 hours.Get Started Now