The credit squeeze

The Baltimore Sun

Wall Street might be in turmoil, but plastic-container manufacturer Maryland Thermoform Corp. is having a great year. Forget contraction - the Baltimore company is looking into equipment and software upgrades.

The thing is, those purchases require financing. That's where Wall Street's troubles become Maryland Thermoform's problem.

As major banks and investment houses fail, small businesses are finding financing harder to get - never mind if they're growing and didn't have anything to do with mortgages, credit-default swaps or any of the complex financial vehicles bringing big companies down.

"In the past, I'd only have to talk to one or two people before I could find a home for a loan. Now it's five or six banks," said Jeff Peisach, who as principal of Spectrum Finance in Owings Mills works as a commercial loan broker for small businesses.

"A lot of times, you see a tough economy and it's the borrowers that are struggling, not the banks. This is unusual. Now there's creditworthy businesses but a lot less banks."

Two-thirds of U.S. banks told the Federal Reserve in a survey released in August that they had recently tightened their lending standards for small businesses, the biggest percentage in at least 18 years. All signs suggest it is worse now. And uncertainty about the fate of the $700 billion financial bailout, voted down Monday by the House, is one more reason for institutions to hoard cash.

President Bush called the situation "urgent" in a speech yesterday.

The Association for Financial Professionals, saying yesterday that short-term credit markets "have effectively seized up," released a survey in which 40 percent of 326 finance executives said their companies have less access to such financing than they did a month ago.

The problems have rocked big companies dependent on a steady flow of credit such as Baltimore's Constellation Energy Group, which agreed to sell itself two weeks ago. Now the ripple effect is reaching small firms, too.

Drew Greenblatt, president of Marlin Steel Wire Products in Baltimore, thought it was bad in August when he asked his bank for a $175,000 increase in his line of credit. Sure, he said he was told - if you take out a $175,000 certificate of deposit with us.

"And they said it with a straight face," said Greenblatt, who wanted the financing to buy more steel to fill big orders.

That's not to say he likes the idea of a government bailout. His 45-employee company, which makes wire baskets, hooks and shelves, has added workers as it expanded from one shift to three in the past few months. It drives him crazy that big financial firms might get taxpayer aid for making bad decisions - and that he can't escape the rippling consequences from those bad decisions either way.

"We're growing, we're hiring people, we're buying machinery - and they mismanaged their business, and I shouldn't be impacted by it," Greenblatt said. "We're profitable. ... It's just a disconnect."

Maryland Thermoform managing partner Scott Macdonald said the information he is getting from his advisers - that loans backed by the Small Business Administration are available "but most other avenues are disappearing" - is unsettling. He would like to think that money will be flowing freely again by the time he is ready to purchase his upgrades in coming months, but he doesn't know.

"We're just a little pawn in this game," said Macdonald, whose company is having its "best year in years" so far but is expecting a slowdown. "If Washington messes up and credit disappears for everybody ... eventually everything dries up."

Even the Small Business Administration says its lending is down, at least in part because the banks that make SBA loans are being much more cautious despite the government guarantee.

"They're being very, very conservative," said Oliver J. Phillips, assistant district director for business development with the SBA's Baltimore office. "Some of the banks were packaging the SBA loans and selling them on the secondary market, and because the secondary market is in kind of disarray right now, the banks that were doing that are cutting back."

Anirban Basu, chairman and chief executive of Sage Policy Group, a Baltimore economic and policy consulting firm, said Marylanders should plan on unemployment here rising above 5 percent next year for the first time since 1996 even if the bailout passes.

That would mean 17,000 more people out of work at a minimum.

With the economy slowing and loans trickier to get, "the only possible outcome is more small businesses will be constrained financially and many, sadly, will fail," Basu said.

"Significant pain is headed toward Main Street. Their financial lifelines are now jeopardized by the credit crunch."

Franchises, that intersection between big business and small business, are feeling the credit reins tightening. Two major franchisee financiers are pulling back, according to William Blair & Co. analysts, who said in a research note that the moves were "disconcerting."

Tom Palazzo, vice president of franchise development for Foster's Grille, a Northern Virginia company planning to open "fast casual" burger restaurants in the Baltimore area, said his firm's lender recently upped its cash requirements for franchisees from 20 percent to 30 percent.

But Palazzo feels fortunate that his company has a relationship with that lender, which is still making loans guaranteed by the SBA. "Credit has tightened up tremendously," he said.

Kristi Mailloux, president of cleaning service company Molly Maid, which is looking to expand its Maryland presence from seven franchises to 17, said loans are taking six to 10 weeks to get approved rather than the usual four to five weeks.

And new franchisees have fewer options now because the home equity lines of credit they could tap before are much more difficult to get. But the two candidates Molly Maid is considering in the Baltimore area have not mentioned financing concerns, she said.

"I believe it's something that will work itself out with, hopefully, help from the government over the next couple of months," Mailloux said.

As firms look for alternatives, more are calling Baltimore County's Department of Economic Development to inquire about its small-business loan partnership program, a combination of bank and county financing. More banks are calling, too, looking to spread their risk by getting the county involved.

"We usually get maybe three calls a month," said Stan Jacobs, chief financial officer of the economic development department. "In the last two weeks, I've probably had 10 calls."

Peisach, the loan broker, said his clients are rushing to get their loans closed "before something bad happens." In this topsy-turvy environment, he is more nervous about loans with big banks than small ones.

"We have not had any reason to change our lending policy," said Mary Ann Scully, president and chief executive of Howard Bank in Ellicott City, a small institution that focuses on small and midsize businesses. Like some of its customers, "we're still in a growth mode."

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