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Businesses struggle as bank loans remain elusive

WASHINGTON — In January, slow sales and a dearth of creditworthy customers forced Bob Cockerham to close the third of his four auto dealerships in New Mexico.

However, when his bank canceled his $200,000 credit line, cut the amount of inventory it would finance and, finally, told Cockerham to find another lender to work with, he sensed that the end was near.

Although he'd never missed a payment, no bank or finance company would give him the two loans he needed to buy autos or to cover his day-to-day expenses.

"Both of those loans are absolutely gridlocked right now. They're impossible to get," said Cockerham, who owns a Kia dealership in Santa Fe and recently testified before Congress about his plight.

"Everybody thinks this is just a GM and Chrysler problem. It's not. The reality is this an industry problem."

Over the past year, about 1,000 auto dealerships have closed in the wake of high unemployment, a consumer spending slowdown and tight credit. GM's restructuring has put hundreds more on the block, and Chrysler has revoked the franchises of 789 of its 3,200 U.S. dealers.

The closures already have claimed more than 50,000 jobs, according to the National Automobile Dealers Association. Cockerham, who once employed 80 people, has nine workers left.

"If the lending situation doesn't improve, you're going to have very few businesses that survive this," he said.

While the auto industry has been disproportionately battered by the recession, businesses of all kinds continue to struggle to get bank loans despite the hundreds of billions of taxpayer dollars the government has poured into banks to spur more commercial lending.

Many businesses, like Cockerham's, are looking for working capital loans, but even companies with solid credit histories have become higher loan risks because of the recession and because banks remain in a risk-averse mode.

A Michigan mechanical contractor said he'd recently asked a local bank for a $350,000 line of credit based on $1.3 million he's awaiting for work already completed.

The bank agreed, but only if he deposited $350,000 in an equity account.

"So basically, I'd be borrowing my own money and paying interest on it. That limits their risk to zero," said the contractor, who spoke on the condition of anonymity, fearing that his story might spook potential clients. "It doesn't seem to me that banks are willing to do anything. It makes you feel like there's no economic help for us."

Federal Reserve data confirm that business lending by banks fell throughout the first quarter of this year. Excluding commercial real estate loans, U.S. banks had more than $1.5 trillion in business loans on their books last September. That jumped to more than $1.6 trillion in October and November as companies drew down their revolving credit lines because the commercial paper market was frozen.

"For a lot of companies that (revolving credit) became a lifeline for liquidity," said Brian Bethune, the chief U.S. financial economist at forecaster IHS Global Insight.

Since November, however, the volume of non-real estate business loans that banks carry fell each month before inching upward the last week of April.

Many of the nation's largest banks also reported that their charge-offs and past-due business loans increased in the first quarter, a testament to the rough economic climate.

With credit harder to get, more companies are seeking insurance coverage for their accounts receivable. About half of the companies that have such coverage are able to get loans, compared with 34 percent of non-insured businesses, according to Euler Hermes, North America's largest accounts receivable insurer.

The Owings Mills, Md., company, which provides up to $150 billion in credit insurance coverage each year, saw a 40 to 50 percent increase in applications for coverage last year, but the increased activity didn't translate into more policies.

That's because payment defaults are rising during the recession, which makes receivables riskier to insure.

"There's definitely more interest in our product, but we've become a little more stringent in our risk appetite," said Steve Lapsley, a Euler Hermes vice president and risk industry manager. "It's not that we're cutting coverage, it's just that companies aren't as creditworthy today as they were a year ago, so fewer companies are insurable."

As the economy improves, experts such as Bethune say, the lending picture slowly will follow suit. Anecdotal evidence suggests that's already occurring.

Huntington bank of Columbus, Ohio, recently announced that it would provide $1 billion in loans to small and medium-sized companies in Ohio over the next three years, while using a variety of state programs to assist these borrowers.

"Business as usual is not an adequate response to our current economic challenges, and we cannot afford to sit idly by while businesses lack the credit they need to survive in today's troubled economic times," said Stephen D. Steinour, Huntington's president and chief executive officer.

Larson Medical Products, a Columbus company that sells splints and products for radiation therapy, will be the first company to receive a loan under the new program. The five-year, $103,000 loan will help the company obtain a quality certification that's needed to bring more complex products to market, said Peter Larson, the company's president and CEO.

"I've already got the products, but I can't sell them until I have all my certifications in place. So my sales are going to increase because of this. My business is going to grow," Larson said.

The loan also is being evaluated for a state program that will shave 3 percentage points off the interest rate if Larson hires two people, which he plans to do.

"They're really giving my company a boost," he said.


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