Heresy Financial: A Credit Crunch is About to Crush Small Businesses

While the recent fears in the banking sector have waned, we’re not out of the woods yet. A combination of factors, including a slowing economy and rising interest rates, have set the stage for a big danger.

This danger could cause businesses, particularly small ones, to go bankrupt. And it could cause a freefall in the stock market that would be worse than last year’s performance. Sure, that may be an extreme outcome, but the danger is rising.

The problem? A credit crunch. That occurs when banks stop lending. That includes loans to big companies that may borrow money for periods as short as one day.

Typically, there are two reasons why this happens. First, rising interest rates make it less attractive for banks to lend out on such short periods. Especially when yield curves are inverted, such as they are now.

Next, there may be fears of a counterparty risk. The recent bank failures highlighted this issue. When Bank A can no longer trust the solvency of Bank B, they will stop loaning out money overnight.

However, a credit crunch is most likely to cause a banking crisis to expand to companies that need banks for short-term credit needs. That’s the biggest issue, and one that is more likely than it was a month ago.

To watch the full analysis, click here.