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Amid Hopes of Economic Recovery, Small Businesses Battle Credit Crunch

June 21, 2010 at 12:00 AM EDT
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In his ongoing series of reports making sense of economic news, Paul Solman examines the struggles of companies to gain enough credit to stay afloat as lending remains tight.
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GWEN IFILL: Next: a story about companies desperate for credit in order to stay afloat.

It comes from “NewsHour” economics correspondent Paul Solman, as part of his ongoing reporting Making Sense of financial news.

WOMAN: On your mark, get set, go.

PAUL SOLMAN: When he isn’t chasing chickens, Tim Roth runs SRC Electrical, a small manufacturing firm in Springfield, Missouri. We recently reported on the improbable Rust Belt success of its parent, SRC Holdings, despite cheaper global competition and the great recession.

But while SRC Electrical’s customers are buying again, the company and others in Springfield are hard-pressed to grow to add jobs to help fuel the long awaited recovery, because of too little credit. Now, this particular poultry hunt was actually part of a celebration. Roth’s factory had gone a remarkable 12 months without an OSHA-recordable injury, the average comparable operations seven.

The day of games and rewards was a much-needed break for the plant’s employees, who normally spend their days remanufacturing starters and alternators for tractors, trucks, and these days it turns out even ships and trains.

MAN: We are officially in the locomotive business. And we’re going to continue to see that grow.

PAUL SOLMAN: A recent staff meeting to go over the company’s prospects.

During the downturn, SRC Electrical scared up new customers to counter a drop in orders from the old ones. Now, not only is new business humming, but the old business is percolating, too, orders pouring in.

MAN: Right now, we’re 38 percent over first quarter. So, that’s awesome.

PAUL SOLMAN: The staff has been working overtime just to keep up with the flow.

Jack Stack runs the plant’s parent company. Since all his companies practice open-book management, where financial information is shared weekly with employees, he checked the earlier forecasts on the left and the new projections for the month. At first, the numbers seemed to tell a tale of triumph.

JACK STACK, CEO, SRC Holdings: They are really kicking ass. And they’re really beating their plan.

PAUL SOLMAN: But one number seemed odd. Why was the company’s loan balance going to be $130,000 higher than expected? Six hundred and seventy-one thousand dollars was planned for — the new forecast, $800,000. It was bothering Stack. So, we asked G.M. Roth to clear things up for his CEO.

TIM ROTH, general manager, SRC Electrical: Well, basically our sales are up for the quarter over a million dollars over plan. So, we have seen a lot more purchases to get the parts here in time to make sure that we have the parts for the sales order.

PAUL SOLMAN: More sales than expected means the need for more parts than expected. Thus, more credit is needed to buy those parts. The problem: Banks aren’t lending, especially not on short notice.

JACK STACK: They won’t take inventory as a collateral. They will not take buildings as a collateral.

PAUL SOLMAN: So, in some sense, one of the main things holding back a really robust recovery is happening right here. This is exemplified.

JACK STACK: The old days of taking collateral is gone for now. The credit is so tight, you know, the only way you’re going to be able to borrow is going to be on a cash-flow covenant, all right? And they could care less about your assets. So, if in fact you’re not generating the proper cash flow, you’re not going to get the proper credit.

PAUL SOLMAN: It turns out SRC Electrical maxed out its line of credit at the bank. The company’s orders were up so much, it had used all its money to buy more parts.

Roth was in danger of not making payroll. Since the company had no cash to use as collateral for a new bank loan, the way things work these days, the company had to borrow directly from its SRC parent. But without that help, things at SRC Electrical could have come, well, unscrewed.

TIM ROTH: We would have been in a position where we couldn’t supply our customers. If you don’t have the cash to supply them with the product, they will find another supplier.

PAUL SOLMAN: Nationwide, lending by the banking industry fell by $587 billion in 2009, the largest annual decline since the 1940s. According to one study, only half of small employers got the credit they wanted last year.

And despite recent efforts by the Obama administration to boost lending, many still can’t get the funding they need. Why? First, banks are risk-averse. Clobbered on loans made before the crisis, they have hiked credit standards. They’re also keeping more money on hand to cushion against losses, redepositing much of it at the Fed, which actually decided to pay banks interest to keep money out of circulation and keep a lid on inflation.

But, as a result, banks have less money left over to lend, thus hampering the recovery. Back in Springfield, the folks at SRC Logistics collect overstocked parts from firms and try to create businesses out of them. But turning new ideas into new companies depends on new credit, which just isn’t available, says the CEO’s son, Tim Stack.

TIM STACK, general manager, SRC Logistics: I don’t think you can walk into a bank and get any type of money for an idea anymore. You have got to be able to cash-flow it within a very, very short amount of time and show them a return on it. Otherwise, it’s going to be tough.

PAUL SOLMAN: And other businesses we visited in Springfield were feeling the credit crunch, too, like this local massage training school owned by Juliet Mee.

JULIET MEE, director, Professional Massage Training Center: The biggest problem that we have got right now is our growth ate our cash. And getting cash these days is not easy. We have excellent credit scores. We have got excellent credit history. And obtaining credit still is very difficult.

PAUL SOLMAN: Meghan Chambers, owner of the Springfield clothing boutiques Staxx, and Jack Stack’s daughter, didn’t hang all her hopes on getting a loan when she actually needed it. Instead, she applied when her numbers were up.

MEGHAN CHAMBERS, owner, Staxx: I didn’t need the money, but there might be a time that I will need the money. And due to the credit crunches right now, where people are trying to grow, and they need the money right now, and they’re not getting it, and they’re scrounging and everything else, I wanted to cushion our business. And so we took our numbers that looked beautiful and asked them if they could expand our line of credit.

PAUL SOLMAN: And did the bank say yes?

MEGHAN CHAMBERS: And they said yes.

PAUL SOLMAN: Even though you didn’t need the money?

MEGHAN CHAMBERS: No, we didn’t need the money.

PAUL SOLMAN: So, this is an affirmation of the cliche, banks only lend money to people who don’t need it?

MEGHAN CHAMBERS: I guess you could say that is.

WOMAN: Are you ready? Get set. Go.

PAUL SOLMAN: You could also say, at least in Springfield, Missouri, these days, that banks might still be too chicken to lend, putting credit out of reach of many a small business, no matter how earnest its efforts.