The last serious credit crunch, spanning 1989 to 1992, began with the dogged scaleback of lending for commercial real estate, which proceeded to hit business lending. This time, the phenom found its genesis in residential real estate, but the knock-on effects are being felt by everyone from Florida orchid growers to heavy machinery makers. An under-the-hood peek inside the credit crunch that just keeps on crunching.

The credit crisis that was sparked by problems with residential mortgages is spreading to the broader economy -- with banks making it harder and more expensive for some small and midsize businesses to borrow.

While companies with strong balance sheets still can borrow what they need at good rates, others are beginning to feel the chill. In particular, start-up and smaller companies are finding that banks are setting higher rates, seeking more collateral or lending smaller amounts.

This is the way it often unfolds when there is a squeeze on lending. The last significant credit crunch, which ran from about 1989 to 1992, began with a pullback on lending for commercial real estate that then spread to business lending. This time, the problems spread from residential real estate and are being felt by everyone from commercial orchid growers in Florida to makers of heavy machinery.

"The credit crunch is definitely creeping into the broader economy -- the only question is how deep and for how long," says John Graham, a finance professor at Duke University's Fuqua School of Business who coordinates surveys of chief financial officers at U.S. companies. Small and midsize companies are being hurt most, he says, although big companies with poor credit are hit as well.

With other indicators pointing toward a possible recession -- including falling stock prices and rising unemployment -- a widening credit crunch doesn't bode well for the economy. Start-ups and small businesses are generally the companies that create jobs in a downturn. But tighter credit could curb business investment and hiring as companies recalculate the costs of investing in new machines, marketing campaigns or ventures. This could magnify the current slowdown in growth…

(Continue reading on The Wall Street Journal)

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