It is no surprise that society goes through what some may call the financial roller coaster of the unknown. Economists try to predict the next financial crisis or when doomsday is around the corner. The problem is that no one knows what lies ahead.
The knowledge that markets will enter a recession at some point opens up a puzzling question: why do lenders stop lending money during this time? The common default answer is “it’s too risky” or “no one knows how long it will take to recover”. This isn’t the case as is attested by economists or market experts. One can simply look at history and see how long an average recovery takes, with Statista stating that the average recovery for recessions saw the S&P gain 32% back after one year and 42% after two years.
Fear of the unknown
So why does everyone start running towards the exit like the building is on fire, or the world is going to end when it comes to finances? It’s a simple one word answer: fear.
Fear of the unknown is what causes humans to panic. Most people are like sheep. Did you know that if one sheep runs off a cliff, the ones following him will do the same? Not one will stop, seeing the others falling to their doom, and turn around. Many people listen and just follow along without uncovering true knowledge for themselves.
Who benefits the most during a bear market? The ones with the most money and foresight. They buy cheap and take advantage of the fear of those that are scared to lose their nest egg. The ones taking advantage of those who are selling because they see what the news says, that the market is crashing. The sheep sell while those with the most resources buy their stock cheap. Who are the wise ones? Those with more resources? Of course it is.
The mere fact that they invest when others pull out is why they have more money. They don’t walk in fear when they invest, but rather they put their resources to work. They take risks. They walk by faith and not by fear. The majority of billionaires will say they don’t fear to lose it all. That’s the key which most lenders do not understand. Banks seem to be stuck in compliance these days versus trying to get actual loans done. It’s amazing how quick lending stops in the marketplace as soon as fear settles in.
Here are five reasons why lenders should keep lending during a financial crisis:
Lending for Tomorrow: These are the best times to lend because the market will likely be fully recovered within six to twenty-four months. Most lenders have five-plus year terms. One just needs to be creative in lending, such as implementing no payments for six months or interest only payments for the first twelve to twenty-four months of the term.
High Demand: It’s an advantageous time to lend since competitors will most likely have stopped lending and because most banks and lending institutions rely on how the market acts, leaving active lenders the best candidates to choose from.
Risk Averse: A third reason is that because competition is low, lenders don’t have to lend to just anyone. They can be less risk averse in choosing who to lend to. One doesn’t just lend to anyone in the industry that is taking a beating, but makes sure the file is strong when it comes to risk scoring.
Loyal Clients: Lenders that lend when businesses or projects need it the most will undoubtedly obtain loyal clients. It’s human nature to remember those that helped out in a time of need which often leads to referrals and great reviews, increasing a lender’s reputation.
Right Thing: It’s just the right thing to do. The economy, and the people, need lenders to step up when others hide and bury their money. It’s time to step up to the plate and get the marketplace the funds that are needed so that businesses and projects can continue.
Don’t fear the current markets. Embrace the reality that within a short period of time the market will come back, and typically, come back roaring like the thrill of the next loop-de-loop on the roller coaster.
Charles D. Carey is the managing partner and founder of CIG Capital, an alternative investing firm that provides 100% of the funding for a diverse range of industries.