Short Term Loans a Reliable Funding Options for Quick Cash

Bank testing results

Short term loans are still the easiest ways for qualified borrowers to find cash fast. It used to be banks provided money to people in need. Today things are different. The Treasury just released the results of stress tests done on the 19 largest banks in America. The purpose of these tests was to find out if a lingering recession or harder economy would cause further financial ruin to the banking industry.

The problems began when studying the banking system as a whole. Banks are holding billions of American dollars in loans and assets that are backed by real estate. Since the housing industry remains in a decline, banks cannot sell their assets, or estimate a true value of worth. Recovery is what the industry needs, but there is no way to predict when it will happen. A longer recovery time could cause the prices of real estate to fall even lower, thus rendering banks helpless to figure out how to sell assets.

The Treasury is stating that banks now have “toxic assets”, which are those that don’t “have enough capital to cover losses in the worst-case economic scenario.” In response, banks are stopping their lending, the very thing that would help businesses grow and create more jobs for Americans.

Because of the lending freeze, many people are looking to short term loans as a financing option. The recession is affecting people’s abilities to pay debt and they are looking for ways of managing through the economy until it improves.

What do banks do now?

It’s estimated that when the full results of the bank testing come out, approximately half of the 19 banks will need to raise more capital. Giants such as Bank of America, Wells Fargo and Citibank are all under orders to find tens of billions of dollars in capital. To do this there are basically two options:

1. Sell assets
2. Issue more common stock

The government is giving banks 6 months to raise this capital. If they can’t, the Treasury will convert the government’s special “preferred shares into common stock”, which essentially means they will have stock ownership in banks in need. There are some critical of this plan. One Boston investment banker, Frederick Lane stated, “For the shareholders of Wells Fargo or Bank of America, I think it’s an outrage…If equity needs to be raised, it’s going to be raised under perceived duress. Having these banks sell into a firestorm is difficult.”

It’s no wonder why consumers are looking to non-banking options for potential funding such as short term loans. Bank stocks have lost more than half their value since the beginning of the banking crash. Even worse, the hardest hit banks such as Bank of American and Citigroup have seen their stock prices decline more than 90%. If they try to sell more stocks, they essentially drive down the prices of each share of their own stock. Existing shareholders lose and the banks lose. Without government intervention, these banks will have a difficult time regrouping.

Intervention

The government is doing what it can to help shore up the banking system, however it is going to be a long drawn-out process. With 19 major banks under testing and only three in the clear so far, consumers need to be ready to utilize alternative funding options, such as short term loans, for a bit longer. Hopefully as the recession passes, the banking industry will find ways to recover and return to lending.