October 2008

Extra

Credit Crisis Comes of Age

The whispers about the lack of available credit have become shouts. Financial institutions, shell-shocked by free-falling financials (Wachovia lost $8.9 billion dollars in the second quarter) and the reality that even if you are Bear Stearns you can go belly up, simply aren’t feeling all that generous.

Commercial and institutional loans fell nearly 3% during the past year, according to the Federal Reserve. This was the largest decline since 2001. Whereas earlier this year banks were freely extending credit, in June bank credit was plummeting at an annualized rate in excess of 6%, according to a report in The New York Times.

This means industry companies will have a tougher time securing credit should they need it. “Unless you have lines of credit with the banks already or terms with suppliers, it is going to be very difficult, especially if you’re a new business in this industry. People are not giving it,” says Robert Stillman, owner of Farfromboring.com (asi/192001) and a former Wall Streeter. “A lot of my buddies who are still on Wall Street say the bank debacle is affecting the economy from the top down. Wachovia, Citibank, all of the major institutions are having problems.”

Distributors may also find suppliers reacting a lot like the banks when it comes to credit terms. “Suppliers are getting gun-shy,” says Stillman. “Liken it to the mortgage business. The banks got socked and are now saying ‘no mas.’ Some suppliers are the same way.”

Leon Belwitz, president of CPS Keystone (asi/43051), says he hasn’t cut back on terms as of yet. “Not as long as they had the same business patterns they had in the past,” he says. “They will get the same credit they always had.”

One insulating factor is the fact that many distributors have come to rely on credit cards, which works in the favor of suppliers like Belwitz. “It’s a cost to us, because we have to pay the credit card companies, but on the other side of the coin, we have the advantage of knowing the funds are good and that we’ll get the money quicker,” he says. “It’s become the cost of doing business these days.”

For some distributors, like Joe Oxbolt, not a whole lot has changed. The president of Ed’s Trophies (asi/186022) says business is up 8% this year. “I have a couple of loans I have to pay off by February, but my credit is strong,” he says. “I am being inundated once or twice a week with folks or companies who have credit programs.”

While Stillman also says he’s not hurting for credit, he did make sure to line up enough available credit just in case. “I have lines of credit in place in case things get rough,” he says. “If it comes to the point that you need credit, and then you go for it and you don’t have it, it’s already too late. You need to put things in place beforehand.”