Advertisement

SKIP ADVERTISEMENT

Small Businesses Feeling the Chill

Some small companies say they are no longer able to get loans from newly cautious banks as credit tightens across the country, and even those who do qualify are increasingly reluctant to borrow and expand, fearful of overextending themselves in the midst of the financial crisis.

Alan Petrucci, whose small factory near Chicago makes metal molds that other manufacturers buy to form plastic parts, says his bank recently offered him an additional loan. Though orders for his molds are still plentiful, Mr. Petrucci says he will borrow only to upgrade existing machinery, not to expand.

“We are bracing for the downturn that is coming,” Mr. Petrucci said. “It is coming; there is no question about that.”

Mark Snyder, another businessman, is more optimistic, but his bank refused two weeks ago to grant another loan to his fledgling medical supply company near Denver. So he turned to a commercial lender, which has offered credit — at 30 percent a year. Mr. Snyder does not want to borrow much at that rate. “We desperately need more capital to grow our sales,” he said.

Small businesses in America — the 27 million companies employing fewer than 500 people and in most cases fewer than 20 people — account for half of the nation’s output. A downward swing, whether caused by expensive borrowing or pessimism, could weaken the economy and shrink employment. Small businesses employ 40 percent of the work force, the Census Bureau reports, and they outpace large companies in generating new jobs.

“Small businesses are sitting on their hands,” said Chad Moutray, chief economist of the Small Business Administration. “Either they can’t get the capital or they don’t want the capital. They read what is happening, and frankly they are scared.”

Even with the current turmoil in the credit markets, big established businesses generally have far greater access to credit than their smaller cousins. For borrowing, small businesses often rely on banks, credit cards and small-business loans. Big businesses have substantial bank lines of credit that they can draw down as needed if they have trouble issuing new debt, usually a less expensive option. While the markets remain cool to financial companies and those with any hint of debt problems, many corporations have been able to sustain their financing, often by selling commercial paper, a form of short-term financing, albeit at higher rates than a month ago.

At Burlington Northern Santa Fe Railway, a giant freight line with 40,000 employees and $20 billion in annual revenue, the biggest concern is the rising cost of all its credit, said Thomas N. Hund, the chief financial officer. “We will continue to borrow to fund expansion,” Mr. Hund said, “and if we saw growth in the economy next year, we would have an appetite for a greater expansion plan. But we don’t see growth, and we are going to be extremely cautious in our investments.”

That sense of bracing for harder times is evident in little ways, at companies large and small. George Wendt, the owner of Chicago Metal Rolled Products, which forms steel into supports for stadium roofs, school gymnasiums, large canopies and the like, has reduced the steel he keeps in inventory over the last month, buying only what is immediately used.

That decision, multiplied across many companies, means suppliers will make less and stockpiles will shrink. There will be less production to drive the economy.

Chicago Metal is saving money, and so far its customers, mainly commercial construction companies, continue to buy the curved steel supports. “When you just watch the news, everything sounds pretty gloomy,” said Mr. Wendt, who employs 85 people at a plant in Southwest Chicago. “But so far our market is still relatively strong.”

Mr. Petrucci, who owns B A Die Mold in Aurora, Ill., employing 17 people to make his metal molds, also says the financial crisis has not touched him. What is more, the banks, having shed what they consider risky borrowers, are actively selling loans to those they consider creditworthy, and that includes Mr. Petrucci’s company. With $2 million in annual revenue, almost no debt and enough orders to keep busy through January, Mr. Petrucci’s lenders are coming to him, he says.

The rate they offer has risen to 7 percent, a percentage point more than in mid-September, but the lenders are persuasive. Mr. Petrucci says he will soon borrow $200,000 to replace an aging computer-controlled lathe and to acquire the latest in electrical cutting gear.

Image
Mark Snyder says he needs to borrow more money for his growing medical supply company, but his bank would not lend it. A commercial lender would — at a 30 percent interest rate.Credit...Kevin Moloney for The New York Times

“We are not going to increase capacity; we are buying this equipment only because we want to do things better,” he said. “We are gambling that this financial disaster is going to have a controlled solution, and hopefully it won’t impact us too greatly.”

Die Mold’s trial by fire came in the 2001 recession. Half of Mr. Petrucci’s roughly 140 competitors in the Chicago area went under, and Die Mold’s staff shrank to 17, the present number, from 28. Orders picked up by middecade, but Mr. Petrucci, a mechanical engineer who founded Die Mold in 1968, says he resisted the temptation to expand his operation to its former size and risk going under in the next downturn.

“It would have to be very severe to hurt us now,” he said, adding, for example, that his automated grinding machines operate unattended at night, and if orders were to shrink substantially, he would turn off the machines overnight as a first step.

Superior Medical Supply, which Mr. Snyder, who is 30, and two relatives founded in 2004, buys all sorts of medical equipment and supplies from manufacturers, and resells them to nursing and ambulatory care facilities, private doctors and surgical centers. The customers normally pay within 60 days, Mr. Snyder said, but he must pay his suppliers in 30, which means he needs credit to bridge the gap — and more so than ever as sales rise toward the $6 million mark.

Early on, a community bank gave Superior a $100,000 line of credit. Last year it raised that to $175,000. But when Mr. Snyder sought another increase late last month, he was turned down.

“We are being told that the company does not appear strong enough to take on additional financing,” Mr. Snyder said. To qualify for more credit, he said, Superior would have to increase the $500,000 the partners now have invested in their company.

So they turned to the Liquid Capital Corporation, which lends against “receivables.” That means Superior gives Liquid Capital the right to collect the money owed by Superior’s customers, and Superior, in return, gets a line of credit. Mr. Snyder would like to draw down $240,000 to keep his company’s expansion on track, and Liquid Capital says it is ready to lend that amount.

But Mr. Snyder is reluctant to borrow so much, at 30 percent annual interest, so he will draw down only $150,000. “We don’t want to expand at a rate that causes instability for our company, and borrowing $240,000 at 30 percent would do that,” he said.

The growing reluctance by conventional banks to lend is reflected in Liquid Capital’s loan activity, which has increased 40 percent since August, to $200 million, the company says. The National Federation of Independent Business, in its monthly survey of 600 members, found in August that 10 percent were having more difficulty getting bank loans than three months earlier. That was the highest level since the 1990-91 recession.

“In late summer, conditions did get tougher,” said William Dennis Jr., the federation’s director of research. “Our members are nervous about going to their banks.”

Some are also nervous about their sales. Michael Frome, 40, a partner in Fromeco Scale Avionics, says they are way off. He and a partner lease space in a hangar in Sandy, Ore., where they and three employees build parts for remote-controlled model airplanes — not the balsa wood variety, but steel planes with wing spans up to 10 feet. Hobbyists buy them for $5,000 to $10,000 and often race them.

A month ago, Mr. Frome realized that the hobbyists, most of them men over 50 with six-figure incomes, had all but stopped buying the planes and replacement parts — including a new electronic device, developed by Fromeco, that logs flight data. Sales plummeted from a $1 million annual rate to half that level, and they are still falling.

Mr. Frome attributes the sudden drop-off to the sophistication of the hobbyists, whom he describes as conversant with Wall Street, investors themselves and shocked more than most by the current debacle.

“I think my customers are quickly reducing their discretionary spending to near zero and squirreling away money,” Mr. Frome said. “Fear and uncertainty grip them.”

A correction was made on 
Oct. 17, 2008

An article on Oct. 2 about the difficulty many businesses are having in procuring credit quoted incorrectly from a comment by Thomas N. Hund, chief financial officer of Burlington Northern Santa Fe Railway, about the company’s borrowing strategy. He said, “We will continue to borrow to fund expansion” — not to fund “maintenance,” which is financed from cash flow.

How we handle corrections

Advertisement

SKIP ADVERTISEMENT