Credit freeze puts businesses on thin ice

Janet Hildreth is gearing up for Black Friday at her San Francisco flooring company.

Orders have plunged so precipitously that she is laying off half of her 40-person staff at the end of this week – the first such cuts in the 36-year history of Tree Lovers Floors Inc.

Hildreth had intended to get through the rough patch by using her $250,000 home equity line of credit to help meet payroll. But her bank, Pasadena-based IndyMac, was seized in July by federal regulators. The institution recently rescinded her credit line, even though, Hildreth said, she has excellent credit and more than $400,000 in equity in her home.

Plan B was to tap a $30,000 American Express credit line. But AmEx said that was no longer available because she hadn’t used it.

“I’m mad at the banks,” said Hildreth, 47. “Because of all the deadbeats, they’re coming after me. But they’re contributing to the problem by denying credit … to people who’ve never been late.”

Her ex-husband, Christopher Hildreth, 57, who founded the business and is still a partner, is cashing in an insurance policy to keep the company afloat.

As lenders tighten their fists and consumers tighten their belts, businesses from small restaurants to industry titans like AT&T are getting squeezed.

Some are slicing inventory as they struggle to find financing to buy new merchandise. Others, unable to get loans to cover payroll and operating costs, are laying off employees or closing their doors. Even businesses that have healthy revenue and are up to date on their payments are having their loans called in or their rates raised.

Some businesses are landing loans against the odds. Tracis Verfaillie applied successfully last month for a $11,000 loan for Chocolatt, the confectionary he owns in West Los Angeles. His good credit history was the deciding factor, he said.

But the National Small Business Assn. reported that 67% of small businesses said in August that they had been affected by the credit crunch – and that was before September’s market turmoil. The number of small businesses using bank loans is at a 15-year low, and 32% said their loan terms were getting worse. The same was happening with credit card rates, 63% said.

The Credit Manager’s Index, which the National Assn. of Credit Management uses to measure credit and collections professionals’ confidence in the economy, dropped a record 3.3% in September. All 10 components of the Combined Index slipped, with seven at record lows.

The speed and depth of the credit crisis has been stunning, catching even the most seasoned businesspeople by surprise, said Cris Steller, owner of Roseville-based Steller & Steller Association and Insurance Consulting.

Steller, whose company manages trade associations for industries including automobiles and construction, said many of his clients and peers saw trouble brewing months ago and slashed expenses accordingly. But none anticipated having their business credit lines pulled at the same time that their customers could no longer get financing. He named three local car dealerships and one boat dealership that have closed in the past year alone.

“Payrolls are getting harder to meet. Cash flow is extremely difficult,” Steller said. “I’m getting the feeling that if we don’t have sort of a federal deal that a lack of cash flow is going to bring everything to a halt.”

Start-ups, manufacturers and construction businesses are in a particularly bad bind, said Scott Hauge, president of Small Business California. Business owners who took out home equity lines of credit to supplement their operating budgets are hitting a wall as banks begin freezing or restricting the funds. As vendors tighten their credit terms, businesses are being pressed to cover their loans more quickly. Meanwhile, clients are also trying to delay payments as long as possible.

But big companies are hardly immune from the woes.

The credit crunch has slowed the efforts of DineEquity Inc., the Glendale company that owns the Applebee’s and IHOP restaurant chains, to sell many of its 483 company-owned Applebee’s locations to franchisees. The sale was to be a key component of DineEquity’s $1.9-billion acquisition of Applebee’s last year.

But potential buyers have been unable to get the financing to finish the deals, according to analysts. Last month, JPMorgan analyst Steven Rees said DineEquity had completed only 26 transactions and “has a long way to go to reach its 100-unit goal by year end.”

Even the world’s largest telecommunications company is not immune – AT&T Inc. said it was unable last week to sell any commercial paper (essentially a short-term IOU) for terms longer than overnight, despite its solid debt rating.

Georgia-based Bill Heard Enterprises Inc., the largest chain of Chevrolet dealerships in the country, shut down its 14 locations last week after losing up to $5 million a month. The company filed for Chapter 11 bankruptcy protection Monday and owes $229 million to BMW Financial Services, JPMorgan Chase Bank and GMAC, the latter of which discontinued credit for new inventory at some Heard locations last month.

John Symes, owner of three car dealerships in Pasadena, said he had laid off employees and expected to let more go. Nervous lenders are offering dealers lower credit limits and asking for faster repayments, or demanding larger down payments, he said.

“There’s no light at the end of the tunnel,” he said. “The last thing anyone needs is a new car.”

John Hawkins, a partner in eight dealerships in Los Angeles, San Bernardino and Riverside, said lenders are reneging on deals made in better times. Plans to remodel the dealerships stalled after a meeting Tuesday, where CoMerica Bank withdrew its tacit approval of any modifications, Hawkins said. The bank also advised against any expansion, saying the lack of liquidity in the credit market would make financing the purchase of other dealerships difficult.

“Within the next two or three days, every dealership is going to hear from their bank,” he said. “There’s havoc and there’s blood on the floor and it’s only going to get worse.”

Other businesspeople are avoiding banks entirely. George Irwin and his wife bought two Sacramento brew pubs in February, only to watch the capital’s economy sag amid the real estate downturn and a budget stalemate that delayed payments to thousands of workers and businesses.

Food costs are up and sales are down. The couple has burned through its initial operating capital and a home-equity loan. If business at their Sacramento Brewing Co. doesn’t improve, they may have to take on partners.

One place they won’t be looking for help is a bank. Irwin figures it’s a waste of time.

“I don’t know that I would lend me money in [our] situation,” the former attorney said.

Fewer business owners are applying for loans, said Ray Gagnon, the business banking manager in Fullerton Community Bank’s business lending department.

The bank is underwriting loans much more carefully these days. Gagnon’s department granted 20 new loans this quarter – half the number approved the previous quarter.

“Business owners who were thinking of expanding are now pulling back a bit to see where all this is going,” he said. “The market for selling loans has really dried up, and that’s hindered us a bit. We’re a conservative bank – we look for people who can service the loan without getting themselves or the bank in trouble.”

Tim Watson’s bank recently pulled the $50,000 line of credit that he traditionally relied on to get his Lakewood tent and awning cleaning business through the slow season. The veteran businessman has had to dismiss some temporary workers and may furlough some of his full-time staff of 15 at Cleanawn Tent Cleaning.

“I’m figuring out who gets cut and what bills don’t get paid,” Watson said. “When the banks tighten up, everyone down the line feels it.”

 marla.dickerson@latimes.com

 tiffany.hsu@latimes.com

 jerry.hirsch@latimes.com

Staff writer Peter Pae contributed to this report