Credit Crunch Is Still Squeezing Small Business

Some morning last October, with the stock market taking a beating and economic forecasts going from bad to worse, I decided to call my banker. Emerald Packaging, my 46-year-old family-run plastic-bag manufacturing company, had scaled back our credit line earlier in the year–at his suggestion–in order to save fees on the unused portion. Talk about a great guy. He'd even promised me that if I ever wanted to restore my former limit he'd get it done. Well, now seemed like a good time to call in that offer. Better to go into a recession with more cash than less.

Looking back, I should have known better. My bank had just bought a troubled rival, its stock was taking a beating and the economic news had to be unnerving them, too. But that morning, when I reached John, I expected no problems. And at first he had no qualms. But the next day he called to tell me that he was under great pressure to get fees up, so if I wanted the line extension I'd have to pay an additional .25 percent on any borrowing. That seemed reasonable enough. Then, just 24 hours later, he told me he couldn't do a deal–at all. "Lending decisions are out of my hands, out of anyone's hands here," he told me, with a hint of panic in his voice.

Instantly, I violated the first principle of recessionary banking: make your bank your friend. Instead I turned on John, my own panic taking over. I swore I'd find another bank and expressed frustration about my decision to keep all of our business, including equipment financing, with his institution for the past six years. Then I ended the conversation telling he'd proved the old adage: "Banks are your friends when things are going good, but couldn't care less when they're not."

These days I'm hardly the only small-business owner to face banking problems. I have one friend whose bank shuttered his line telling him they didn't feel his service business was a good credit risk anymore, even though he was operating within his covenants. Another owner I know has decided to dip into his personal savings rather than draw on his line for fear of alerting the bank to his increased need for cash. Then there's the contrarian. I know one guy who drew down his entire line and stuck the money in another bank. Fearing the worst, he moved before his bank could.

Despite such stories, the swift turnabout in my banking relationship shocked me. Even though we dealt with the local commercial arm of a national bank, we'd always felt well treated. John had handled our account since we signed on–an almost-unheard-of stability in the banking industry. At the start of our relationship, he had negotiated a great rate for us on our credit line, allowing us to borrow close to prime. Later he waved the provision that we open our books to the bank once a year since we already had audited financials. Rarely did he question our quarterly or annual reports. Instead, he seemed intent on selling us more products, usually successfully. For instance, we switched our 401(k) pension program over after learning the bank would cut the fees charged to our employees and the company.

But driven by what I viewed as betrayal, and paranoia that trouble might be brewing, I quickly moved to replace our bank. I reached out to someone I knew at another institution, and she jumped at the chance to meet with us. Initially, I only wanted to discuss a new-equipment loan. When their proposal came back with a good rate and few strings, I asked them to look at handling everything from our line of credit to our deposits.

That's when I realized that even in a recession, your bank really has to be your partner, too. Our deposits were of enormous importance to my original bank and to my new lender. Under pressure from the federal government to raise capital, almost every bank these days is hungry for deposits. As a small business, it was easy for me to forget that I had something my bank might want–or need. But this new bank made it quite clear. Even though they had a solid credit rating, they would do just about anything for us if we were willing to move our deposit account over.

About that time, John's boss called. I'd fired off an e-mail to her expressing my anger over the credit-line fiasco. Like any good executive, she heard me out, then asked whether I felt the bank had committed itself to extending the line in return for the .25 percent interest rate increase. "Absolutely," I replied. "Then that's a commitment we made, and one we have to keep," she said. For a moment I was stunned. They did care! My old bank seemed to be back, with local management making the calls. We then agreed that she, John and I would meet face to face more often, perhaps quarterly instead of once or twice a year, in order to prevent surprises that would damage our future relationship.

But even with the happy ending, there is no doubting things have changed. John now has more questions about our financials, and pays closer attention to the date they're due than they did in the past. His boss asked me for an outlook on this year's margins, again, a first. That discussion worried me all over again. While I expect our business to be solidly in the black, like most companies, I don't know where margins could end up.

I understand why our bank, or any bank, feels the need to be more rigorous these days. But the shifting ground has left me uneasy enough that I'll continue building bridges to other financial institutions. I've reached out to contacts–it turns out I have quite a few –I haven't spoken to in years, and many are interested in talking. As for our new-equipment loan, we're giving that business to a new bank. John still has our main accounts and we're still on friendly and solid terms. But in this economy, it makes sense to hedge our bets. We've kept everything else as it is, and we're still on solid terms with our old bank.