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Credit Crunch Hits Small Tech Firms

Small tech companies feel the credit pinch.The House has just passed the banking bailout bill and not a moment too soon. Experts have been talking about how the effects of credit tightness were starting to be felt by most of the country, and small technology firms have found that they are in just as bad a position as everyone else.

Often analysts look at high tech and assume that stock liquidity and large war chests often insulate companies from some of the vagaries of the capital markets, at least in areas like M&A. It's true that having tens of billions in the bank and valuable stocks can let the largest firms proceed as they wish.

However, the Microsofts, Oracles, Apples, HPs, IBMs, and SAPs of the world are in the minority. There are far more medium and small businesses that don't have sizeable war chests, and many of them are feeling the pain.

Mark Strong, owner of Harleysville, PA-based communications equipment manufacturer JLI Electronics, saw the handwriting about a year ago and planned accordingly. A good thing: Two weeks ago he got letters from a national and a regional bank, both of which had given him credit lines. "They said, 'Your credit line has been reduced to what you have now and we'd like you to pay it off,'" he says, even though his credit is "perfect." Strong's translation is that once he pays off the credit lines, they will be closed out.

Even though he did plan for this eventuality, the action still affects the company: "We have to be more cautious in extending credit to our customers." Instead of buying a year's worth of production materials for a greater discount, he'll probably take a six month's supply.

For Diane Kirkpatrick, president of Computer Access, a software engineering firm mostly doing work out of Longmont, CO for government contractors, hasn't gotten that kind of letter yet.

"I'm scared to call [my bankers] because the line of credit on the business is unsecured," Kirkpatrick says. She sometimes needs the money to cover payroll and healthcare payments while she's waiting for her customers to pay invoices.

"We don't get paid for maybe 90 days or more after my people do their work and we pay them and their health insurance," she says. Then there are the times when payment is really late. "One of our customers will either switch their accounts payable people and that person takes a while to catch up a bit, or sometimes there's a mistake in our invoice and they don't even look at it for 90 days, then they'll contact us about the mistake. Then we'll send a new invoice and it takes another 30 days [to get paid]."

Neither Kirkpatrick nor Strong is optimistic about how much the bailout will ultimately help. "I don't know if the banks getting the $700 billion will go more for [loans to bigger companies]. I think they'll be more cautious and a lot of small businesses are going to go under. I have some really good employees, and I don't want to tell them that I can't pay them." Her bookkeeper's house went into foreclosure two weeks ago.

Strong is less diplomatic. "You have all these banks that are sitting on piles of these bundled rotting mortgages," he says. "Maybe they get 20 cents on the dollar if they sold them into the market and then they'd have some cash and lend money. But if they think mommy government will pay them 40 cents, they sit back and do nothing. And when it got voted down, they shut down people's credit lines and twist their arms to get them to call their representatives and say, 'You know, I think it's a good idea after all.'"

But Congress has acted and the banks will be able to jettison large portions of their toxic investment choices. The question is what choices they will make now.

Loan sign image via MorgueFile user kevinrosseel, standard site license.

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