Credit is the grease that helps keep the wheels of the economy spinning. And as credit gets harder to come by, some businesses are starting to squeak.
"Everybody is, I think, very gun-shy," says Kryson Bratton, owner of Piper Whitney Construction in Houston. "We've got the R-word — recession — floating around and sometimes it feels like the purse strings get tighter."
Bratton has been trying to get financing for a Bobcat tractor and a IMER mixing machine to expand her business installing driveways and soft playground surfaces. But banks have been reluctant to lend her money.
"It's not just me," she says. "Other small businesses are struggling with the same thing. They can't get the funds to grow, to hire, to buy the equipment that they need."
The shockwaves left by the collapse of two big banks last month is expected to make lenders even more tight-fisted, limiting economic growth and raising the risk of recession.
Liz Southers runs a commercial insulation business in South Florida. Her husband and his brother do most of the installing, while she handles marketing and business development.
"There's no shortage of work," Southers says. "The construction industry is not slowing down. If we could just get out there a little more and hire more people, we would just have so much more opportunity."
Southers says it often takes a month or longer to get paid for a job, while she has to pay her employees every week. If she had a line of credit to cover that gap, she could hire more people and take on more work. But while her bank has been encouraging, she hasn't been able to secure any financing.
"They're like, 'Your numbers are incredible.'" Southers says. "But they're like, 'You guys are still pretty new and we're very risk averse.'"
The Federal Reserve Bank of Dallas surveyed 71 banks late last month, and found a significant drop in lending. It already costs more to borrow money, as a result of rising interest rates. And the recent failure of two big regional banks is likely to make other lenders even stingier.
After the collapse of Silicon Valley Bank last month, Alex Cates called the bank in Huntington Beach, Calif., where he keeps his business account and renewed a line of credit late last year.
"We've got a great relationship with our bank. Randy is our banker," Cates says. "I was just checking in."
Cates wanted to be certain the money he keeps in the bank — up to $3 million to cover payroll for 85 employees — is secure, since it's well over the $250,000 limit that's typically covered by deposit insurance. Randy assured him that his money is safe, and stressed that the bank is very conservative.
"Through that conversation, he said, 'FYI, not that we think any differently about your business, Alex, but had the [Silicon Valley] banking situation happened in December, for example, I don't know that we could have gotten your line of credit renewed," Cates says. "Just because you're only a 2-and-a-half-year-old, almost 3-year-old business that presents a risk."
As a depositor, Cates is grateful that the bank is extra careful with his money. But as a businessperson who depends on credit, that banker's caution can seem like overkill.
"It's a catch 22," he says. "I've got $3 million in deposits and you're telling me my credit's no good? We've never missed a payment. They have complete transparency into what we spend our money on. But now all of a sudden, we could have been looked at as an untenable risk."
As banks across the country get more cautious, that acts like a brake on the broader economy. The Federal Reserve thinks tighter lending standards could work like an extra boost in interest rates, and help to bring down inflation. But the ripple effects are hard to predict.
"You want the economy to cool. You want inflation to come back towards the 2% target. But this is a profoundly disorderly way to do it," says Joe Brusuelas, chief economist at RSM.
Lenders aren't the only ones who are getting nervous. Bratton, the Houston contractor, has her own concerns about borrowing money in an uncertain economy.
"Even though I would love to have an extended line of credit, I also have to look at my books and say how much can I stomach sticking my neck out," she says. "I don't want to be stuck holding a bag if things flip on a dime."
