This is a very real problem that has occurred to many of our clients...and you might want to give this some serious thought...Proper planning will help you avoid panic.
An unsecured business line of credit gives your business access to cash on demand. It offers you a flexible way to borrow money. BUT what happens when the bank unexpectedly calls (or pulls) back the line...and in doing so the bank is effectively cutting off access to your working capital. Well, you are not alone...as this predicament is, unfortunately, too common. The stories we have heard from our clients/business owners are ones of complete horror...stories of banks pulling their lines or capping their existing credit.
...and here are some examples of quotes in this article written by Julie Bennett of Entrepreneur.com, when writing about small business owners whose lines were pulled:
“I was suddenly working without a safety net”
“It drives you crazy. I'm doing a good job, I'm still making money...but then they do this, anyway?"
"If I can't find a new bank to take on this credit line, I will be forced into bankruptcy”
Having $7,500 in reserve really helped. In case a check didn't go through from a client, it was there to rent studio lights or pay my cell phone bill."
"A few years ago, losing a line of credit was a crisis--today, it's the new normal,"
Losing credit suddenly can devastate a small business operation. Banks pull credit for a number of reasons. For example:
- Your bank may have been acquired by a larger bank
- A review of existing accounts may reveal an undesired risk
- Stricter underwriting standards
- Underused credit line
- The business may be experiencing instability (partner left, assets may have been sold, etc.)
If your LOC was pulled and you don’t have reserves (or a plan), you need to make changes and act fast:
- Have an emergency meeting with your CFO and/or accountant to devise an action plan.
- Follow up with a management meeting.
- If you don’t have a CFO because the cost is too high, hire the services of a virtual CFO or business consultant
- Discuss the possibility of bankruptcy protection with your attorney.
- If you need bridge financing, don’t react…make sure it’s planned out (it is always a good idea to work with a business consultant that you can trust to provide guidance in times of need). Understand the costs and plan an exit strategy
- Look into the possibility of a private investor or an equity partner
If your business has a LOC that you depend on, there are some steps you can take to minimize losses:
- Establish a relationship with a local credit union. Have an open discussion about capital financing products.
- Check your FICO score and take necessary steps to improve it. This may require hiring a professional.
- Establish a reserve account that you can use in case of emergencies.
- Establish an invoice factoring agreement where you can select the invoices you factor.
- Have regular and periodic meetings with your management team to always review contingency plans.
- Ensure you have an accurate and recent third-party business evaluation.
In short, if your LOC was pulled or the bank called your loan, don’t wait. Seek help immediately. Contact us at firstname.lastname@example.org.