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Crisis Felt Unevenly on Main Street
Some Firms Can Still Tap Credit; Others Strain

By David Cho and Michael Fletcher
Washington Post Staff Writers
Wednesday, October 1, 2008

The financial crisis that has roiled Wall Street and toppled some of its leading institutions has had an uneven impact on Main Street, leading to sharply divided opinions within the business community over whether Congress should approve the Bush administration's $700 billion rescue package.

A wide range of companies that depend on loans and services from financial institutions such as Wachovia are worried about their dwindling access to credit and are putting pressure on lawmakers to act. Among them are cash-strapped small businesses, the ailing auto-dealership industry and franchise owners of chain restaurants such as McDonald's and Sonic, who are suddenly struggling to get loans as their traditional lenders, such as GE Capital and Bank of America, face problems of their own.

But other businesses, such as local chain the Healthy Back Store, report few problems borrowing money because they either had good credit histories or do not have a lot of debt on their books. They say they are far more concerned about whether consumers will keep their wallets shut in the coming holiday season than whether credit will continue to flow freely from Wall Street.

"The way the bailout has been sold to the general population, including small businesses, is that you are going to perish if you don't get this through and your credit is going to dry up overnight," said George Cloutier, who is founder and chairman of American Management Services, which consults for small businesses. "We talk to . . . small business owners on the phone every day. And I think the most important thing that we are hearing is they hate the concept of the bailout. They feel that Wall Street is being given a free ride."

But both sides appear keenly aware that Wall Street's problems, if unsolved, would eventually lead to a severe recession that would hurt businesses across the economy.

"Our concern is with what would happen without the rescue plan, if capital does tighten up and continues to be hard to come by," said John McEleney, who runs two dealerships in Iowa and is the incoming chairman of the National Automobile Dealers Association. The association reports 600 dealerships nationwide have closed this year. "The auto financing model could struggle, whether it's customers financing the vehicle or dealers financing their inventory."

Because of the tighter credit markets, Amber Sutton, for one, was required by her bank to use her own house and personal stock investments as collateral, as well as get life insurance to obtain a $400,000 loan. She needed the money to launch her business two months ago, a pet day-care business in Woodbridge, which is part of a franchise called Dogtopia.

"It was very difficult," Sutton said of the loan process. "Nobody turned me down . . . but banks were a little more cautious."

Businesses that had a relationship with Wachovia have also been hit hard since the banking giant's troubles surfaced. On Monday, to prevent its collapse, the government engineered a sale of Wachovia to Citigroup.

Because of that deal, Wachovia said it would stop managing the Commonfund, a nonprofit that runs $41 billion worth of endowments and short-term funds for 1,900 universities, hospitals and other institutions across the country, including as many as 100 in the Washington region, according to John S. Griswold, a spokesman for the Commonfund. The move froze the short-term fund, leaving many of the organizations without access to needed capital.

Griswold said that the situation was unusual and that the group was actively looking for a trustee to replace Wachovia. Still, "it's clearly hurting a lot of people."

He added that "higher education institutions remain very concerned that this rescue bill pass."

In the meantime, said John Walda, president and chief executive of the National Association of College and University Business Officers, the colleges with money in the fund will have to "find some liquidity somewhere else. A letter of credit or some other short-term lending vehicle. But that is not easy these days, nor is it cheap."

"This is very problematic because a number of clients rely on this fund to make payroll and pay for other needs in their daily operating budgets," he said. "There is nothing wrong with the underlying value of the assets it the fund. But you just can't liquidate the fund because the market is frozen up."

Auto dealerships are facing rising interest rates because they heavily relied on Wachovia and other big Wall Street institutions to borrow money to refresh their inventories of vehicles.

Rates on these loans have been soaring and contributed to the collapse of Bill Heard Enterprises, which called itself the nation's largest Chevrolet dealership. Earlier this week, the dealership filed for bankruptcy citing sagging sales and the tumultuous credit markets. The Georgia-based company had dealerships across the South that sold an estimated 40,000 vehicles a year. The shutdown caused the layoffs of 3,200 employees.

Other car dealers are also shouldering higher interest rates. Their borrowing costs are set on the international financial market. Libor, or the London interbank offered rate, which is the rate that banks worldwide are charging each other for short-term loans, has spiraled with the financial crisis.

"My rates are floating rates for floor financing. As Libor goes up, those rates go up," said Jack Fitzgerald, owner of Fitzgerald Auto Malls, which operates a dozen locations, mostly in Maryland.

Fitzgerald said he is able to absorb the higher borrowing costs on his $50 million credit line. But he said that other dealerships are forced to rearrange credit as some lenders leave the marketplace.

"There is some question about availability," he said. "There are some institutions that are pulling back, from what I've heard from my friends."

Beyond their own borrowing costs, many car dealers say they are concerned about the ability of their customers, many of whom are shaken by steep losses in the values of their homes, to get credit to buy new cars.

"Most dealerships have long-term relationships with lenders, and they are probably going to have options, even if some sources of credit dry up," said Peter Kitzmiller, president of the 340-member Maryland Automobile Dealers Association. "Our biggest concern right now is how much credit is going to tighten for our customers as this shakes out."

Gerard Murphy, president of the Washington Area New Auto Dealers Association, which has 225 members in the greater Washington-area, agreed that at this point consumer credit was a bigger obstacle for car dealers than their own financing.

"We have gone from a situation where a lot of people could get financed -- perhaps some who should not have -- to a situation where it is much more difficult to get financing," he said.

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