The collapse of Bear Stearns has become a symbol of the credit crunch. But the effects of higher borrowing costs are being felt far beyond Wall Street. Across the country, smaller businesses are also struggling to get loans.
It's a problem that keeps John Crowley up at night. Crowley, who works as the controller at Transit Mix Concrete in Colorado Springs, Colo., says his company, which sells concrete for construction projects, is having trouble securing credit.
"I have not been sleeping here well lately," Crowley says. He adds, "It's tough right now. In fact, we're trying to get loans to run the business."
Like other companies, Transit Mix uses loans to cover everyday expenses, such as buying cement. Right now, the company needs more than a half-million dollars.
A couple of years ago, getting a loan like that was much easier, and banks were charging low interest rates — as little as 4 percent. Nowadays, "They're talking in the 7 to 8 percent neighborhood," Crowley says.
This is what the credit crunch looks like outside of Wall Street. If Crowley wants the money now, it could cost him double. And the banks aren't even sure they want to lend to his company anyway. The collapse of the housing market has knocked at least 30 percent off his concrete business.
"They want some sort of assurance there won't be a default on the loan," Crowley says. "I think everybody is looking at the ways banks do business now a lot more closely than they did in prior years."
Dampening Expansion Plans
John Graham, a professor of finance at Duke University, says banks made too many loans during the housing boom to people who couldn't pay them back. "The banks have gotten burned," Graham says - they lost money and are now more cautious about lending to businesses as well.
"Some very solid small- to medium-sized businesses that don't yet have the profits they can live off of, but they do have a great trajectory — suddenly, they are having a hard time getting funds from the banking system just to run their businesses or grow the way they want to grow," Graham says.
Graham and CFO magazine survey more than a thousand chief financial officers every few months. In their last survey, more than one-third said credit problems were directly hurting their companies; most of those respondents said they had put off expansions plans as a result.
Graham has been conducting the surveys for a dozen years. He says he's never seen so many businesses facing credit problems.
"The numbers are huge now, way bigger, and just broadly pervasive throughout the economy, across industries," he says.
The U.S. Economy is like a car engine, and credit is the motor oil. It lubricates the machinery of the economy so it can run quickly and efficiently. If credit begins to tighten up, businesses slow down and so can the economy.
"We take liquidity for granted. We assume it's going to be there. And if it's taken away — even if for only a brief period — it really shocks people," says Graham.
Smaller Margin for Error
Mike Williams is vice president for finance at HemCon Medical Technologies in Portland, Ore. HemCon makes bandages for severe battlefield wounds. It wants to buy an Irish medical company, but it needs about $50 million to do so. In December, a bank officer said Williams could have the money at about 5.5 percent interest — a good rate.
But when Williams returned just a few weeks later, the rate had jumped to nearly 8 percent. The banker who gave Williams the new terms "somewhat sheepishly handed me the term sheet, slipped it across the table," Williams says, adding, "I was absolutely amazed."
The bank officer said credit had tightened.
The new rate meant Hemcon would have to pay an additional $300,000 in interest over the term of the loan.
Hemcon is going ahead with the purchase anyway, but Williams said it now has a smaller margin for error.
"If there were to be a hiccup down the road and the credit situation hasn't improved by that time, it could be very difficult," he says.
Williams said in that case, HemCon would have to sell a stake in the company to keep it going.