Many small businesses rely on a bank-approved business line of credit as a convenient source of short-term financing. But preserving this credit-line is not always so easy. Most banks make a commitment for one year. At the close of the year the business’ financial statements, tax returns, and credit rating are reviewed. If the bank does not like what it sees, then it may not renew the credit-line, and you may be expected to pay the remaining balance in full.
Many business owners may not realize that the bank generally has the authority to “call” the full amount due immediately and without reason.
Suddenly losing a line of credit can be a devastating blow to a small business. Here are 5 tips that can help a business hold on to its credit line even when business performance is poor:
1. Be clear about the bank’s requirements. Make sure to carefully read over your loan agreement so that you know what the banks expects in terms of providing information and repaying the loan.
2. Manage your line of credit carefully. Business lines of credit are meant for small purchases and to provide instant financing to cover a cash shortfall. You should be aware of the amount of money leaving the account, as well as where the expenses are coming from. If you leave balances on your line of credit then make an effort to pay the monthly principle on time.
3. Know when to rest; know when to be active. If your business is going through a difficult patch and you are using your credit-line regularly, then consider “resting” the account every now and then. Resting the account means that you pay the entire balance and refrain from using the credit-line for a short period of time. This shows the bank that you have the ability to cover the account.
On the other hand, if see that your business is not using the account, because you have a positive cash flow, for example, then consider making a few small purchases on it anyway to keep the credit-line active.
4. Keep the lines of communication open. When times are tough, make sure to communicate with your bank about the situation. You will have a greater chance of holding on to the account after you give over your story personally. Where possible, even if business is fine, it is a good idea be in touch with your bank periodically throughout the year. This will help build a relationship that could prove helpful when and if calamity strikes.
5. In an emergency negotiate payment or turn to other financing. If your bank suddenly calls the full amount due, don’t panic. First try to negotiate the repayment of the outstanding balance. These days, there’s a good chance the bank will make it easier for you to pay the amount due. In the meantime, you should look for another line of credit. If you aren’t having any luck or you need the money quickly, then you can try other sources, such as factoring accounts receivables or turning to an asset-based financing arrangement.