Credit Crunch Squeezes Small Business

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VIRGINIA BEACH, Va. - Over half of the American workforce is employed by small businesses. Millions of these companies rely on credit to fund expansion and meet payroll expenses. But the country's credit crisis is squeezing some of them out of business.

David Nygaard Jewelers

Just a few years ago business was booming for jewelry story owner David Nygaard of Virginia Beach, Va.

"We went from one to seven stores in about three years. Following that expansion, we were successful, things were going very well with us," Nygaard said.

David Nygaard Jewelers was doing so well that the company was awarded top honors in the business world.

Nygaard explained, "In 2006 we were named the Virginia business of the year, by Virginia magazine. We were named best places to work, and we were excited about the opportunity."

Nygaard commented that success and recognition paved the way for more credit offers from Wachovia, the company's bank.

"They came after our business very aggressively, and came with an offer that we couldn't refuse in terms both of the quality of the loans and the pricing," explained Nygaard.

But after flat retail sales last Christmas, Wachovia called Nygaard's loan. Basically, the bank required repayment of everything that Nygaard owed - immediately.

Even after holding liquidation sales, the jeweler earned nowhere near enough to cover the loans.

The result was shocking.

"They placed us into default. They came in and seized our inventory, locked it up in a safe in our store," explained Nygaard.

Nygaard went on to say, "When they decided to call the notes in default, all notes were current and were up to date, we had never been late, there was no delinquency at any time."

With no other financing options, Nygaard was forced to shut down his business.

Tightened Lending

Nygaard's story is not too unusual these days. Tight economic times have forced banks to tighten their lending standards, making things that much harder for small businesses. Many were already having a hard time getting financing before the credit crisis even started.

Sixty-five percent of domestic banks have tightened their lending standards for small business loans over the previous three months. Seventy percent are charging more for those loans.

Molly Brogan of the National Small Business Association explained that small businesses are feeling the pinch.

"We polled our members in February and again in late August. In February we asked 'Has your business been affected by the credit crunch?' Fifty-five percent responded that they had in fact been affected by the credit crunch. In August that number jumped up to sixty-seven percent," said Brogan.

The global credit crunch is so widespread that businesses from McDonald's franchises to car dealerships have had difficulty getting loans.

Brogan said that owners of small businesses have to make painful sacrifices, often at the expense of their employees.

"We were not even able to make our last payroll as a result of these events. So our employees were terminated and their last two weeks of pay was withheld from them because the bank accounts were frozen," commented Nygaard.

Richard Kidd is one of Nygaard's 35 employees who lost his job.

"Something that's in the headlines, the tightening credit markets, it was in our living room," explained Kidd.

Brogran added, "If business doesn't start turning up they're going to have to start looking for ways to cut, whether that's through health insurance, whether that's moving full time employees to part time positions, there are a number of things people are considering because it is pretty tight out there."

Ignoring the Little Guy

Meanwhile, Nygaard points out that while big companies like AIG and others get help from the federal government, small businesses do not have it so easy.

"That's the challenge of small business. We're not big enough to get on the radar of some of these other institutions that can help bail us out," he said.

*Original broadcast October 16, 2008.

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