Your Line of Credit Matured. Do You Need Business Banking Advice?

Posted by Bill McDermott on Mon, Aug 09, 2010 @ 08:21 AM

I can't tell you how many business owners have come to me stating their line of credit has matured and they're looking for business banking advice. Banking for small businesses is trickier than it has been in the past due to the changes in the banking industry and economy. A good business banking consultant can be helpful in times like these. There are 5 things you should do when you line of credit is about to mature. I hope these are helpful.

Go to www.FDIC.gov and check out your bank's financials. Many banks are having liquidity or capital adequacy issues and just aren't renewing lines of credit for these reasons. It's better to know that as quickly as possible before your line has matured and you're in crisis management mode.
Get your year end financials together for the bank and an interim financial statement that compares the same period this year against last year (ex July 2010 vs. July 2009) Ask for a meeting with your banker to go over these financials and ask them if they see any difficulty in renewing your line of credit.
Prior to that meeting, review your commitment letter to be sure you have complied with all the terms and conditions of the commitment. Did you meet the 30 day annual payout? Did you violate any covenants in the commitment? Covenant violations potentially give the bank a reason not to renew the line. So, be prepared to discuss why it happened and why it won't happen this year.
Know when it's time to get a second opinion. If you're experiencing significant delay in response time, if you feel the relationship has changed or has become one-sided in the bank's favor, it may be time to get a second opinion.
If you've had a change in bankers and you find yourself in a group called Special Assets or Problem Loan Administration, your bank is signaling to you they want out of the relationship. It is likely your rates and fees will increase and loan amounts and loan maturities will decrease.

I've seen many businesses look for alternative answers to handle their working capital needs. Several business owners are turning to asset based lending or factoring as an alternative source for bank financing. This kind of financing does provide an advance rate of between 75% to 85% of accounts receivable less than 90 days. However, the cost of capital can be as high as 25-30% on an annualized basis. For many businesses, this is higher than their gross margin which begs the question why sell the product if all of your margin goes to financing cost? Asset based lending or factoring may be the only way to go.

I hope this article has been helpful. If you have further questions, please send them to me on the "Ask A Banking Question?" button on this page.

Post Comment
Name *
Email *
Website (optional)
Comment * Allowed tags: <a> link, <b> bold, <i> italics
Receive email when someone replies. Subscribe to this blog by email.

Subscribe via E-mail

Download our "Inside the Vault" Whitepaper

Browse by Tag

From Inside the Vault...

Your Line of Credit Matured. Do You Need Business Banking Advice?

Comments