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News commentary: Tight credit slowly chokes equipment purchases

John Kalkowski, Editorial Director -- Packaging Digest, 2/1/2010 2:00:00 AM

 

John Kalkowski-Editorlal DirectorIndustry is now nearly two years into one of the worst recessions of all time. Within the last year, the federal government has poured nearly one trillion dollars into the capital markets to stabilize Wall Street and the big banks, keeping credit available so that the economy doesn't seize up entirely.


However, the billions in To Assist and Repair Profits (TARP) funds somehow never trickled down to small- and medium-sized businesses supposed to be the drivers reviving the economy. After all, it's estimated that small businesses have created two-thirds of the net payroll growth in the U.S. since 1990.

So, packagers and their equipment suppliers remain strapped with cash constraints, tight capital budgets and few places to turn for financing to make investments for the future. It's a Catch-22. If you can't buy the latest packaging technology, it's difficult to stay competitive.

Over the years, many packagers carefully planned their investments and funded capital purchases with cash from operations. Stagnant sales make that difficult today. Now, just when they need them the most, traditional sources of funding have dried up. Many packagers first would turn to their local banks and then consider loans from specialty firms. Suppliers are often being asked to share the burden through creative, extended terms, but they are also facing cash-flow problems that limit their ability to help. Equipment leasing is another option for about 5 percent of the packaging market.

Today, financing is not that expensive; it's just tough to get, as lenders increasingly are unwilling to make risky bets on startups and small businesses. The application process is becoming more difficult and time-consuming. One industry insider says new businesses especially are getting clobbered, as lenders want to see long, clean credit histories. Even then, some contract packagers who plan to install lines to gain new business are being asked for financial cross-guarantees from their end-user customers.

One good source for financing is the Small Business Administration, which can gurantee up to 90 percent of a loan's amount. However, SBA loan volume also dropped in 2009, partially due to the complicated process and banks' reluctance to participate in the program. The federal government must do more to help all small businesses, including those in packaging. This should come from streamlined processes, financing guarantees and extensions of tax credits. It's time to let your government representatives know they must act now, or we'll all pay later.

 

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