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Edson Packaging Machinery Ltd. is debt free, but that hasn't insulated it from the pain of tight credit conditions.

“A lot of our suppliers are saying the banks are being quite frugal with money,” said Robert Hattin, the Hamilton-based company's president and co-owner. Many have been told they can only have an operating line of credit worth roughly 35 to 40 per cent of their receivables, down from about 75 per cent, he said.

On the other side, Edson's customers are also experiencing new credit woes. “It used to be they'd pay us in 20 or 30 days, and now they're stretching that out to 60 days,” Mr. Hattin said. “We're passing on that delay of payment, so it all pushes down.

“It goes through the food chain and, unfortunately, it's the little guys who get hurt at the end of it.”

A rising number of businesses are reporting more difficulty getting credit at terms and prices they can accept. Federal Finance Minister Jim Flaherty said last week it's the No. 1 issue he is hearing about in prebudget consultations, a finding backed up yesterday by survey results from the central bank.

They indicate widespread pessimism in the business sector, and have increased expectations that the Bank of Canada will further cut interest rates and inject liquidity into the system.

The percentage of companies reporting tighter credit conditions in the bank's quarterly Business Outlook Survey, which has been conducted since 1997, reached a record high. Nearly two-thirds of those questioned from mid-November to mid-December said conditions had tightened, and most said that came in the form of higher borrowing costs. The deterioration in conditions was expressed across business sectors.

Similar sentiment was expressed in the central bank's Senior Loan Officer Survey, which collects information on the business-lending practices of 11 major Canadian financial institutions. It found that the price of loans is rising because financial institutions are seeking to pass their own higher costs on to borrowers, and that terms and conditions are tightening along with the limit of funds allocated to some sectors.

“The two Bank of Canada surveys indicate a marked intensification of credit tightening in the last quarter,” noted Royal Bank of Canada assistant chief economist Paul Ferley. “This, in turn, weighed on most aspects of economic activity.”

The results suggest companies will invest less over the next year, and expect the level of employment to contract.

“With survey-high degrees of tightening of lending conditions, and businesses bracing for falling sales along with pulling back their [capital expenditure] and hiring plans, the recession should deepen [in the first quarter],” Bank of Montreal economist Michael Gregory wrote in a research note. The survey results “justify further Bank of Canada easing, likely raising the risk of a cut greater than 50 basis points next week.” (A basis point is 1/100th of a percentage point.)

Rick Jamieson, chief executive officer of ABS Friction Inc., a company based in Guelph, Ont., that makes brake pads, said banks now want business owners to give them personal guarantees.

“We're a long-time, solid company, and what we'd like to see is the ability to borrow at reasonable rates,” he said. “And that is impossible.

“For a long time, Export Development Canada was probably the best way for an exporter like me to access funds from a Canadian bank, because EDC will insure your receivables for up to 90 per cent. So in the past, it was very easy to get a bank to lend you up to 90 per cent of the value of your accounts receivable as long as you had EDC insurance. And now that's not even good enough any more. I'm not willing to sign a personal guarantee to get increased lines of credit,” he said. “The banks are really tightening up.”

On Friday, officials from the Finance Department, banks, and Crown corporations that deal with credit held the first meeting of a working group created to deal with credit issues. Mr. Flaherty said Friday he will be watching to see whether “tangible actions” come from the group.

Canadian Manufacturers & Exporters sent the Finance Minister a letter saying that his first priority in the budget must be ensuring sufficient credit. “If short-term liquidity challenges are not urgently addressed, other measures to stimulate economic growth and save jobs will be purely academic,” the letter said.

Goldman Sachs economist Andrew Tilton said yesterday's survey results raised the downside risks to Goldman's already pessimistic forecast for Canadian economic activity in the first half of 2009.