source for article: Wall Street Journal, by Simona Covel, Kelly K. Spors & Raymund Flandez
As Wall Street quaked Monday, small and midsize businesses prepared to feel the aftershocks in the form of tighter credit and tougher borrowing standards.
The financial crisis is the latest blow to small businesses, which have suffered through a tough year. As consumers pulled back on spending, these companies have faced more-stringent requirements from bankers, higher rates on credit cards and other loans, and the loss of funding sources from real estate, such as home-equity loans.
Now, the environment looks grimmer. Small and midsize companies are likely to see tougher requirements from their bankers in coming months.
Robert Caplin For The Wall Street Journal”If you’re seeking a new line of credit, [the effect] will be instantaneous,” says Andrew Zacharakis, professor of entrepreneurship at Babson College in Wellesley, Mass. Interest rates will move higher and the bank-loan approval process will be more rigorous, he predicts.
Some businesses with solid credit histories and long track records will probably be only slightly affected, predicts Scott Shane, an entrepreneurship professor at Case Western Reserve University in Cleveland. But many start-ups with no financial track record and those with less-than-stellar credit histories will have trouble borrowing money to run and expand their operations.
The crisis may also affect companies’ plans. Already, some small businesses are delaying big purchases and putting big projects on hold because of the uncertainty in the economy, says Raymond Keating, chief economist with the Small Business and Entrepreneurship Council, a small-business association. Tom Markel, chief executive of iBank.com, an Irvine, Calif., company whose Web site helps match small businesses with lenders, is seeing the effects of the crunch firsthand. In mid-March — before the Bear Stearns Cos. collapse — potential lenders were viewing about 65% to 75% of the postings on iBank.com. That has dropped to a low of about 22%, says Mr. Markel.
He predicts that more small businesses will approach credit unions and community banks, which many borrowers may not have considered before. Already, some small businesses are turning to alternative nonbank lenders, pledging assets or accounts receivable as collateral.
In the past three to four weeks, Shelly Karras, president of Fordham Financial Services Inc., a nonbank lender in Northbrook, Ill., has fielded more calls from bankers looking to unload credits that they consider risky — primarily those that belong to debt-laden small businesses.
A year ago, Mr. Karras says, he would have considered seven to eight referrals from banks in a month’s time to be “outstanding.” In the past couple of months, bankers have passed along between 10 and 15 referrals each month — and the companies tend to be more stable businesses than in the past, such as a furniture importer that has been profitable for four straight years.
Chuck Doyle, managing director of Business Capital, which offers restructuring services and lending to small businesses, thinks many more entrepreneurs will be facing that harsh reality.
Crisis on Wall Street
AIG, Lehman Shock Hits World MarketsAIG Faces Cash Crisis as Stock Dives 61%Old-School Banks Emerge on TopComplete Coverage: Wall Street in Crisis”Lots of people believe they’re bankable. They’ve always been able to get financing,” says Mr. Doyle, who is based in San Francisco. “But when those credit lines come up for review, they’re going to find they’re not wanted and they’ve got to find another source.”
Sterling Energy Resources Inc., a small oil-and-gas producer based in Overland Park, Kan., lost about $2 million in uninsured deposits when its local bank — Columbian Bank & Trust Co. — went under in late August. Under Federal Deposit Insurance Corp. rules, the company can offset those losses against a $6 million loan that Sterling had at Columbian.
But in order to realize that offset, Sterling has to find another bank willing to take on the loan-which in this environment is very difficult. “I’m having to go out in the worst credit crisis in the world to find a bank to take that $6 million loan,” says Chief Executive Reid Scofield.
In the meantime, the company had to lay off four of its 15 employees, and is trying to manage on the $100,000 that the FDIC insured.
Write to Simona Covel at firstname.lastname@example.org, Kelly K. Spors at email@example.com and Raymund Flandez at firstname.lastname@example.org