When Tara Olson learned that her bank wasn't going to renew her business credit line, she felt like the rug had been pulled out from under her marketing research firm, AllPoints Research Inc., in Winston-Salem, North Carolina. And for good reason: Without the line of credit, the $2.5 million company would have difficulty making payroll and paying vendors, unless Olson and co-owner Sherrie Aycock tapped into their personal resources.
"[We] have situations where we'll be working on a project that is worth maybe a couple hundred thousand dollars, but that client, because of their payment policy, is going to pay in two installments and it's going to take them 60 days to process the first invoice," says Olson, 44. "During that time period, we've already started the project. We're spending money. And on something of that size, we need a line of credit to help us cover those expenses while we're waiting for the collection to come in."
Naturally, when their longtime bank announced it was pulling the plug, the news was devastating. "We were operating under the assumption that it wouldn't be a problem," Olson says of the credit line renewal. "We had never been late with a payment. We met all the requirements. It just never occurred to us that they would not be interested in our business."
Instead of accepting a short-term credit extension with an exorbitantly high interest rate, Olson and Aycock, 53, kicked their funding search into high gear. They asked several banks to make bids before they settled on an offer from Wachovia Corp.--a bank that wasn't even part of their original search efforts. A Wachovia business representative in their area happened to cold-call the business owners when they were shopping for a new lender. "We had not even approached Wachovia because we thought it was too big," says Olson. "We had this mind-set that we had to be with a small bank. But Wachovia just blew us [away]." The company's new credit line is twice as large as the one their prior bank offered and has a significantly lower interest rate. Says Olson, "That experience really educated us on what we should expect from our bank."
You've Been Let Go
As Olson's experience shows, your business doesn't have to be performing poorly for your bank to cut off funds. In fact, there are any number of reasons a lender will call in a loan or refuse to renew it for another year. In some cases, covenant violations or lackluster financial performance are to blame. Or the bank may want to part ways because it doesn't make enough of a profit on your account.
"Some small businesses don't realize that banks are going to look at a lot of things [when considering] a line of credit, not just if things [might] go bad," explains Gene Fairbrother, president of MBA Consulting Inc. "Small-business owners don't necessarily have a good comprehension of how a bank will sit down and evaluate a line of credit. For example, a bank may give a business a line of credit for $150,000, and the business thinks they're doing [well] because they're not using that line of credit. Well, [they're] wrong--the bank wants them to use it."
To avoid being blindsided, it pays to periodically ask your lender this simple question: "How do I keep my line of credit?" says Fairbrother. "Know what the bank wants. Don't be afraid to ask questions."
In some cases, such as Olson's, your bank's decision to withdraw funding may be well beyond your control. Perhaps the lender merged with another bank and has a new borrower profile. And though it doesn't happen that often, your bank may simply decide to exit your particular industry. "The companies might be performing really well, but the bank has made a decision that they just don't want to cover that [industry]," says Cynthia Flanders, senior vice president of Bank of America's commercial banking group. "Usually, if it's not a financial reason on the client's part, it's an industry strategy."
If your bank is determined to sever ties, it's important to keep the lines of communication open while looking for a new source of credit. Start by asking for a short-term credit extension. As a general rule, you can expect the bank to give you about 30 days before it cuts off funding, according to Fairbrother. "A lot depends on how that line of credit is collateralized," he says. "If you're losing your line of credit because you've been working on a receivables program and your receivables are going down, you have bad receivables or [other] problems, [it] may affect the amount of time [the lender gives you]. If it's a situation where you and that bank are just not a good match or you're not using the line of credit, they may give you longer. They're going to look at the risk factors involved."
During your lender search, it's important to avoid burning any bridges with your old bank. Fairbrother says, "You can go in and say, 'I really wish you could do a line of credit, but I understand your situation. You know that my business needs a line of credit to survive, and when I go to [another] source to look for the next line of credit, what, from your standpoint, can I do to help get that?'" In turn, the bank may give you a good reference when it's contacted by a potential new lender. And when you meet with that new bank, be candid about any past problems and the steps you're taking to correct them.
While Olson wasn't in the unenviable position of having to explain poor financial performance, she and Aycock had to help their bank suitors understand their cash-flow quirks. "One of the key things we had to communicate to these different financial institutions was the dynamic nature of our sales," Olson says. "It's never been a problem for us to collect our receivables, but when you're working primarily with Fortune 500 corporations, it is more of an issue of what their payment terms are going to be."Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.
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