Have any of you ever seen the rate (APR) that credit card companies charge for cash advance? I've seen those rates between 29-42% APR for over a decade and even higher for lower credit scores. Ever wonder why? Because that is the actual cost required for lenders who make those kind of loans to make a profit and survive. Even business owners who should understand the meaning of profit and loss still don't get it; only the government can charge whatever they want because they print money, m'kay?
It would be as if for years everyone was befitting from subsidized gasoline prices and then suddenly, the subsidy vanishes leaving everyone in shock as they see the actual price they must pay.
This same dynamic is coming into play more and more as a direct result of the weakness in the banking sector combined with an overt policy shift by the Fed which shows clear favor to large financial institutions at the expense of smaller ones. Banks are experiencing massive convulsions internally as they desperately look to manage deposits fleeing for higher interest rates. The Fed has already back-stopped ALL DEPOSITS including the uninsured ones right, so, why not go to an (uninsured by the FDIC) money market fund that pays 5%? Just because there haven't been any bank failures in the news for almost two weeks doesn't mean we're even close to being "out of the woods" here.
There are brutal internal struggles going on in the board rooms of banks as they wilt under the pressure of a 5% discount rate and 8% prime rate. Stress from these struggles are showing up in corporate board rooms and small businesses in the form of higher costs for the capital they need to operate. In some cases and, I'm seeing this a lot recently, lines are simply eliminated entirely or severely cut back leaving business owners with financing "gaps" that need to be covered from other sources.
As an alternative lender, I am one of those sources. When owners who until recently used banks exclusively to finance all their needs come to me for a quote they're surprised at the rates even though the private lending industry rates haven't changed very much in four years. There was no need to use private-lender capital for them before and they are unfamiliar with how capital is priced when the lender isn't a bank-nephew of Uncle Sam who has the money printer.
The simple fact is that capital has always been a commodity for businesses but the actual costs have been disguised for more than a decade by loose Fed policy which kept the interest rates artificially low. Borrowers may not have been aware this was happening and there's no doubt it was beneficial for growth as cheap money tends to be but, now the party's over.
"At the same time, where Uncle Sam had been playing Russian Roulette with the Federal Deficit and Debt Ceiling, such has been resolved partially as to the Debt Ceiling, but not as to containing unfettered Deficit Spending going forward, or to any concept of establishing long-term solvency of or financial stability for the operations of U.S. Government. Broadly, the current U.S. Economy is in a rapidly deepening and intensifying economic downturn, amidst still-surging inflation pressures and insolvency issues."
Just like an addict has to go through major withdrawal when their drug is cut off borrowers and consumers of capital are now facing having to do without cheap money.
"The problem now is that the debt got a lot more expensive, and that investors thinking of buying this debt have gotten a little more prudent. The problem is the End of Easy Money. Once companies get hooked on Easy Money by having piles of debt, it’s tough to get by without Easy Money."
This is an adjustment most owners will have to face sooner or later. Expectations need to become more realistic and owners should start to include increased capital costs into their planning.
This is the time when the private sector lenders will shine and I personally believe we will become a larger part of business funding plans as owners start to use us more often for their capital needs. Non bank lenders are already quite a force in the mortgage market too!
We're still in the 1st inning of this latest generational change that has overcome America's economy, I look to partner with all of you and meet this challenge together!
"So the U.S. national debt spiked by $359 billion in one single day, the first working day after the debt ceiling was suspended, to $31.83 trillion, as of yesterday evening, reported this evening by the Treasury Department."
