March 6 (Bloomberg)  -- ``Many small- and medium-sized businesses are not complaining about credit conditions,'' Boston Federal Reserve Bank President Eric  Rosengren said in a speech last week.

Tell that to Tim  Arnett in Minneapolis.  About a year ago, the 53-year-old set up a company called In-Season  Mechanical LLC, which installs heating and cooling systems in buildings and  homes. His bank, Wells  Fargo & Co., said he would need to be in business for about nine  months to qualify for a loan. His revenue in the second half of last year was  about $179,000.

``They're now saying  we need two years of credit history before they will even consider us for a  line of credit,'' says Arnett, who employs four people and estimates that  revenue this year has soared to $900,000. ``Every financial institution we have talked to has used the same excuse, that banking regulators are scrutinizing  loans, they're tightening up the restrictions. What they're saying is, we did  some dumb things, we're not being penalized for it, but now you're going to  get penalized.''

Arnett's experience  underscores the difficulty facing the Federal Reserve. While it can influence  the price of credit by slashing its key interest rate, the U.S. central  bank can't do much to boost the availability of funds needed to keep the  economy afloat.

Flexible Friends

Without a bank loan,  Arnett's firm ``lives and dies by the credit card,'' he says. ``If the  government is not willing to let entrepreneurship thrive, if the smaller  businesses that truly have good ideas and good workforces are stymied, it's  going to affect the economy nationwide, and I just don't think the government  gets it.''

A study presented to a conference attended by economists  and Fed officials last week suggests Arnett is in good company in worrying  about the economic implications of potential borrowers going begging, even  after five reductions have pushed the Fed's key rate down to 3 percent.

David  Greenlaw, a Morgan Stanley economist; Jan  Hatzius, Goldman Sachs Group Inc.'s chief U.S. economist; Hyun  Song Shin, a Princeton University economics professor; and Anil  Kashyap, an economist at the University of Chicago Graduate School of Business,  estimate that U.S. mortgage losses may trigger a $900 billion contraction in  lending to households and businesses.

Crimping credit, the  study says, would reduce economic growth by as much as 1.5 percentage points  over four quarters. ``While these estimates have many caveats, they still  suggest that the feedback from the financial market turmoil to the real  economy could be substantial,'' the authors wrote.

`Refunding Risk'

A study published  this week by Moody's Investors Service showed 300 U.S. companies with  sub-investment grade credit ratings need to refinance $13 billion of maturing  credit lines and bonds this year, climbing to $28 billion next year and $45 billion in 2010. They will struggle to find new money amid rising defaults,  the rating company said.

``The overall  refunding risk is high for speculative-grade bonds and bank credit facilities  as volatile capital market conditions outweigh slight improvements in ratings  over the last year,'' wrote Kevin  Cassidy, a senior credit officer at Moody's.

While the default  rate for low-grade borrowers dropped to a 26-year low of 0.9 percent last  year, Moody's expects the percentage failing to meet their obligations will  surge to 5.3 percent by the end of the year. The combination of ``financial challenges at large banks and bond insurers, a continued housing- market  slump and tighter bank-lending requirements'' will make life hard for  borrowers, Moody's said.

Almost Dead

In Europe,  the market for new bond sales by non-financial companies is almost dead. Just  13 billion euros ($20 billion) was borrowed in January and February, down  from 21 billion euros in the first two months of last year, according to Suki  Mann, a London-based credit strategist at Societe Generale SA. Moreover,  he says one borrower -- General Electric Co.'s funding unit -- accounted for  about 8 billion euros of this year's issuance.

Mann has cut his  forecast for new bond sales this year to 110 billion euros from as high as  140 billion euros previously. That compares with more than 123 billion euros  last year and 126 billion euros in 2006.

``The ongoing  financial markets turmoil has resulted in a sharp increase in risk premia  such that many potential issuers of debt securities no longer find the public  debt capital markets an attractive place for fund raising,'' Mann says.

Cash Flow

Arnett at In-Season  Mechanical is currently fitting cooling systems in a 157-room hostel that  helps the destitute get back on their feet. He had to corral the charity that  runs the hostel; his wholesalers; his electrical and concrete contractors;  and the company supplying the air-conditioning units to ensure everyone  involved got paid as fast as possible because ``cash flow is vital to any  company's survival.''

With a bank loan,  Arnett could expand his business even more rapidly and hire additional  workers. His days of begging for credit, though, are over.

``I don't think I  want to waste any more time talking to the banks,'' Arnett says. ``We're on  our own. All banks look at us like lepers. By the time they're willing to  offer the money, I'm not going to need it anymore.''

(Mark  Gilbert is a Bloomberg News columnist. The opinions expressed are his  own.)

To contact the  writer of this column: Mark Gilbert in London  at magilbert@bloomberg.net  Last Updated: March 5, 2008 19:02 EST