Small businesses get caught in credit crisis

Karen Bradley, like many retailers, has had a tough 2008.

Sales are down about 30 percent for the year. They were down 50 percent for August, typically one of the busiest times for her uniform-supply stores, Karen's Uniforms. When one of her competitors closed two months ago and offered her its ongoing accounts, she grabbed the extra business.

Bradley went to the bank that supplies her line of credit and requested an increase in her limit to purchase the inventory for those new accounts. The bank turned her down.

"That's when I decided to close the other store," Bradley said of her location at the Medical Tower in Norfolk, where the lease ended last month.

She had shuttered her Janaf Shopping Center store in Norfolk earlier this year, leaving the last Karen's Uniforms in Virginia Beach. During the economic downturn, she didn't think she could handle the rent and overhead, particularly after taking on the new accounts.

"It's just too risky," she said.

Across Hampton Roads and nationwide, small businesses are caught in the squeeze of the financial crisis. About 65 percent of domestic banks had tightened standards for small-business loans as of July, according to a Federal Reserve survey.

The problems getting credit grew worse in recent weeks as the financial crisis overtook Wall Street and Washington. Credit markets for large corporations, states and muni-cipalities froze up. When even banks refuse to lend to each other, small businesses don't stand much of a chance.

Without a loan, some business owners are unable to expand or take on new customers. Others cannot upgrade equipment to make operations more efficient. If declines in revenue deplete available funds, some might have to lay off workers or even shut down.

"They're dipping into their own cash reserves at this point to carry them through," said Jim Carroll, who counsels local entrepreneurs as executive director of the Small Business Development Center, a partner of the Hampton Roads Chamber of Commerce. "After that cash reserve dries up, then what?"

Almost 27 million U.S. enterprises are considered small businesses, generally defined as employing 500 or fewer people, according to a Small Business Administration report using 2006 data. Those companies employed about half of the private-sector work force and generated more than half of the nation's gross domestic product outside of agriculture.

Some Hampton Roads business owners said they have enough cash on hand or equity to ride out the economic storm. But even those said they are losing customers who have cut back on spending or cannot secure financing for their own ventures.

Noah Enterprises Inc., a Virginia Beach general contractor that does commercial and government work, has two clients who have put projects on hold because they failed to receive financing, said Carol Curtis, the company's president.

"The banks have tightened the reins as far as the criteria for down payments that people have," she said.

Noah remains busy with government contracts and commercial clients with adequate capital, Curtis said, but she doesn't expect a shift in the credit landscape soon.

"It could be six months to a year before they're able to build as they hoped," she said.

In the past, Jim Weigl had little trouble securing credit to start a new product line or expand an existing one for his company, Virginia Toy & Novelty Co. in Virginia Beach. Recently, he asked his bank for funding to launch a line of party favors and trinkets that don't light up or glow in the dark as most of his products do.

"It was just a simple 'no,' " Weigl recalled.

"It slowed our growth," he said, explaining that sales of the importer's inexpensive toys remain strong even during difficult times. "We have opportunities to grow and expand."

Portsmouth Lumber Corp. needs to replace an old molding machine with a model that is easier to repair and makes a better product, said Chip Hanbury, who co-owns the company with his brother and other family members. With sales down as much as 25 percent this year, he said, they decided now isn't the time to spend the $250,000, plus installation costs.

"Right now, we would love to have another piece of machinery," Hanbury said. "We could use another truck."

Carroll, the small-business adviser, cautioned that owners do need to watch their expenses but must have infrastructure ready when business picks up.

"If you cut back in the wrong areas, you may find out that as demand increases, you don't have that inventory or you don't have those reserves to meet demand," he said.

Barbara Miller has practiced that balancing act at her Chesapeake clothing store, B'Suited. She has trimmed inventory and reduced the selection of some higher-priced items, such as jewelry sets, while trying to maintain enough to entice customers. "You have to keep your store stocked to keep the people coming," she said.

In the face of falling sales and tighter cash reserves, Miller has continued to pay for her merchandise as it arrives, rather than take on additional debt. "There's no need to continue to put yourself in a situation," she said.

Virginia Toy & Novelty faces lender skittishness beyond the meltdown in credit markets. Banks got nervous about toy importers after last summer's surge of recalls and concerns related to lead paint in Chinese-made toys, Weigl said.

If a retail customer wanted a huge order from his new product line, he would have depended on an expanded credit line to ramp up more quickly, he said. Instead, Weigl must now develop those new products - such as a plastic pumpkin to decorate a Halloween table - in more limited runs.

"That just has to be done a lot slower or smaller-scale," Weigl said. "But it's not going to stop the train. It's maybe a little detour on the track."

Carolyn Shapiro, (757) 446-2270, carolyn.shapiro@pilotonline.com