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The Main Squeeze in the Credit Crunch


Even as President George W. Bush tries to jump-start the economy with tax cuts and the Federal Reserve keeps interest rates low, smaller companies across the country are complaining about a powerful drag on the nation's economic engine: Many banks are tightening lending standards, making it harder for small businesses to get capital for the kind of expansion and hiring that would hasten a recovery.

The paradox isn't lost on James A. Knight, chief executive of fiberboard maker Knight-Celotex LLC, a 250-person company in Northfield, Ill. "Although interest rates are low, banks have to be willing to lend money," he says. When he bought a floor-tile manufacturer out of bankruptcy in November, his request for a "low seven-figure" loan required far more collateral and drew far more scrutiny from his bank than he had experienced two years before. "This is what's holding down economic growth," he grouses.

Knight has plenty of company. The net percentage of banks tightening loan standards to small companies rose to nearly 20% in October, the latest month available, from about 6% in the Fed's August survey of senior loan officers. Indeed, from Massachusetts to California, small businesses are having to jump through more hoops than they have in years to line up financing. A recent Kent (Wash.) Chamber of Commerce survey of about 200 small companies, for instance, found that a third reported more trouble borrowing money this year than last. "We're talking about companies with good technology, great market potential, but whose growth is being held back by banks tightening credit," says the Chamber of Commerce's executive director, Barbara Ivanov.

Of course, businesses of all sizes have been facing higher bank-lending standards and stiffer loan terms, because of a weak economy and the banks' growing number of problem loans. But big companies can more easily tap other sources of capital, including the bond and commercial-paper markets. And mom-and-pop-size businesses, boasting closer relations to community banks, report few credit problems. The trouble seems to lie with companies employing 40 or more workers and boasting sales from $10 million to as much as $250 million. "What you're really seeing is a credit squeeze on less creditworthy borrowers, and small businesses generally fall into that category," says David A. Wyss, chief economist at Standard & Poor's. Another reason that they may feel the pinch more is that "they're somewhat less transparent than the big firms," Wyss adds, because many are private.

Some bankers argue that the real problem is not a credit squeeze at all but weak loan demand in a slow economy. That's the main reason, they say, loan volumes have fallen 6% since the end of 2001. Another factor: the looming war with Iraq. "Our clients are still in a very conservative mode, especially when it comes to equipment spending," says Carl R. Tannenbaum, chief economist for LaSalle Bank Corp. in Chicago, which caters to small and midsize firms. Tannenbaum says that the bank's lending standards haven't changed. That's true, too, at Comerica Bank-Texas, says C.D. Heinen, senior vice-president of small-business banking. But fewer companies are meeting the leverage and liquidity standards, given the tough economy. "It's just harder to find those that qualify [for loans], and the smaller the business, the tougher it is," says Heinen.

Even so, this squeeze isn't as painful to small business as the credit crunch of a decade ago, when recession and the banking industry's own financial upheaval prompted banks to shut out even strong companies. That's not happening now, bankers and economists say. "There is money available at reasonable to good terms for good companies that can demonstrate they have the ability to repay," says Paul J. Bonitatibus, chief community banking executive at Hibernia National Bank in New Orleans.

That is little consolation to the increasing number of companies that no longer qualify as "good companies." Especially hard-hit are smaller manufacturers, a sector that already has been clobbered by foreign competition. The credit clampdown "remains a serious impediment to the recovery of manufacturing," which has lost 2 million jobs in the past two years, says Hank Cox, a spokesman for the National Association of Manufacturers.

Few have felt the pain more than Walter T. Towner, president of metal fabricator Thorsen Inc. The Avon (Mass.)-based business filed for Chapter 11 on Dec. 23, after Thorsen's longtime bank demanded that Towner put up his house as additional collateral for a loan. With the company's sales declining, the value of the machinery backing the debt also had plunged. Towner says the 50-year-old company was cash-flow positive and current on all its obligations. Now, the executive is trying to find a new bank, but so far a half-dozen have said they want no part of manufacturing.

Towner could still get lucky. But for him and countless other small-business executives across the country, the banks aren't likely to loosen up soon. "What has to occur first is an improvement in the overall confidence level and the economy," says banker Bonitatibus. "I would say we're more the follower than the leader in that." The stark truth is that companies of all sizes will find money a lot easier to get as soon as they no longer need it so badly. Many of the bigger companies will have no trouble riding out the storm. But for countless small businesses around the country, time and cash are running out. By Wendy Zellner in Dallas, with Ann Therese Palmer in Chicago, William C. Symonds in Boston, Stanley Holmes in Seattle, and bureau reports


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