If cash is king, credit is the stallion it rides. Every year, millions of entrepreneurs and small-business owners depend on credit to start, run and cover the costs of doing business--usually through a line of credit, small-business loan or credit cards. Credit is the lifeblood of small business (and small business is the lifeblood of this economy). Credit can make or break a company during a recovery.
So when banks begin pulling and cutting lines of credit--as they did in unprecedented numbers last year--it is calamitous. In the last six months, 38 percent of small businesses reported a decrease in lines of credit, according to the National Small Business Association; and more than 40 percent of small-business owners who requested extensions to their lines of credit were denied, according to the National Federation of Independent Businesses. Across the country, 'treps have been left scrambling to find emergency operating capital in a market where credit is damn hard to come by. Or they are filing for bankruptcy.
We decided to go after a story about why banks are pulling lines of credit--and more importantly, what you can do if it happens to you--after a series of conversations with entrepreneurs who are dealing with this "nightmare of bankology," as one succinctly put it.
What we learned first is this: Lines of credit may be disappearing faster than Tiger Woods' endorsements, but many entrepreneurs are hesitant to say anything about it out of fear of retaliation. One CEO reported that while he'd love to go on the record with his name, he's fearful his bank will reduce his credit line even further. "It's insanity," he told us. "The banks have all the power and the business owner has none. Zero. Nada."
But financial writer Julie Bennett kept digging and learned much, much more. She turned over every rock to find alternatives to traditional lenders in her article "What to do when the bank pulls your line of credit." Turns out some banks are actually extending for small businesses. Credit unions, as old school as they sound, may prove an excellent option. And some alternative lenders, advertising interest rates of 3 percent or 4 percent a month, are in fact charging desperate business owners as much as 80 percent a year. That's right, 80 percent.
Hell, even in "good" years, money is the thing that keeps you up at night. But right now, perhaps more than ever, understanding who's lending what, when to sign and when to walk away is mission critical to any business owner.
Amy C. Cosper,
Follow me on Twitter, @ EntMagazineAmy