Lenders much less willing to extend credit amid financial turmoil

The Federal Reserve surveys senior loan officers about their lending practices. In the latest results, more than 60 percent of lenders reported tightening their lending standards on commercial and industrial loans to small, large and mid-sized firms.

But who are the business owners that can't tap into credit? Turns out, they'd rather remain hidden.

"To say you're having a cash problem or a cash flow problem is not really a positive thing to say about your business. But it's a fact of life."

That's a Twin cities manufacturer. He asked that we not use his name because he feared his customers will think his business is struggling and avoid his firm. We'll call him Henry. He said his business, which makes parts for other companies, is actually booming.

Create a More Connected Minnesota

MPR News is your trusted resource for the news you need. With your support, MPR News brings accessible, courageous journalism and authentic conversation to everyone - free of paywalls and barriers. Your gift makes a difference.

It's just that lately his customers are slow to pay for completed work and that's draining Henry's resources. One customer recently asked Henry's company to do a $120,000 job, and Henry had to finance half of it upfront. And, he still hasn't gotten paid.

"I have yet to get a single dollar from my customer," Henry said. "So 30 days turns into 60 days turns into 90 days, I'm on the hook, which puts a burden on my cash flow."

A few months ago, Henry got a new credit line from a bank to help his cash flow. The money cost him more than it did a year ago and came with more restrictions. The bank recently refused to extend his credit again.

Now he's fishing around for credit lines at other lenders. Henry said his company is not in dire need of cash, but more capital would allow him to buy some new machines to improve efficiency. So far, the banks aren't biting.

"It's harder to convince a bank that your assets are going up and your business is getting better when around them they see the opposite happening," Henry said.

Commercial loan growth is slowing to a snail's pace, it's near zero. That's according to Jon Arfstrom, of RBC Capital Markets, in Minneapolis. He tracks a number of banks in the Midwest, and said they're less willing to lend.

"So even some of the best customers are being told by their banks that they're going to have to pay higher rates and higher fees, and there will be less availability of credit," Arfstrom said.

But one area lender does not see widespread limits on credit. John Houston is president and CEO of BANKWEST in Rockford, Minnesota, and past chair of the Minnesota Bankers Association. He said some banks are taking a closer look at how much cash businesses are generating, since it's what they use to pay a bank back. But, Houston said, there are companies, manufacturers among them, with good cash flows and continued access to credit.

"It does seem to vary," Houston said. "We've seen some businesses that do business international and because of the value of the dollar it seems like their business is very good. From a cash flow perspective they're doing fine."

Carleton College economics professor Michael Hemesath said he hasn't seen data suggesting that the credit crunch is widespread. He thinks it's mostly industries tied to the housing sector that are pinched. He said banks could hold back on lending for reasons other than a 'credit crunch.'

"You might very well say the economy is slowing down, and so for this industry, which I still think is healthy long run, it's operating in a macroeconomy that's slowing a bit," Hemesath said. "So I'm going to be a little more cautious lending, even to that healthy industry."

Hemesath is not persuaded that the size of the federal bailout package is warranted, and he said if it were needed so badly, the stock market would've tanked again this week while the deal foundered.

But Henry the manufacturer hopes the proposed bailout will lubricate the credit markets. Otherwise, he's in a bind. When his customers delay in paying him, and credit's hard to come by, he's slower in paying his suppliers.

"It winds up causing problems all the way down the food chain," Henry said.

But even if the proposal goes through, some experts say it may be months before businesses really see credit markets loosen.