Not too long ago a close friend of mine who owns a digital imaging company based here in Michigan had his line of credit frozen, and the explanation from the bank was that his house had lost more than 30 percent of its value. It didn’t matter that he was never late on payments and was a long-standing customer for more than 10 years.
But rather than continuing to talk about the negative impact that the credit crisis has had on thousands of business owners, I would prefer to share with you specific factors that flag and trigger a bank to change the terms of your credit line. To prevent a bank from cutting your credit line, you need to reduce your risk level.
To do this avoid the following red flags, and you also will keep your business off the radar screen. Keep in mind that while these are not the only factors, they are the most common.
Missed Payments. Missing payments can easily raise a red flag; so at all costs catch up on overdue payments and pay more than the minimum.
Poor Financials. Banks re-evaluate their business customers using their tax returns and projected income statements to determine their creditworthiness. Weak earnings for the year can trigger an adjustment to the terms of your credit line.
Reduced Bank Rating. For example, your balance rating was a “Low 5” ($10k for a three-month period) and drops below to a “Mid 4” ($5k for three-month period).
Depreciated Value. If you have secured your credit line using collateral that has depreciated in value or business receivables that have reduced significantly, stay off the radar by adding additional collateral to offset the depreciation.
Lower Credit Scores. A drop in credit scores and new derogatory items showing up on personal credit files are a major contributor to credit lines being cut across the country. Avoid making large purchases on credit cards that could put your debt to credit limit ratio above 30 percent. In addition be sure to monitor your credit on a regular basis and avoid inquiries.
One of the best ways to protect your business credit line is by NOT putting all your banking and credit lines in one basket. It scares me to think of how many business owners across the country have put total dependence on one bank to handle all their deposits, withdrawals, checks, savings, credit lines, loans, credit cards, and so on. It’s so important to diversify your business banking relationships and credit lines.
By establishing multiple business credit lines with several banks, you will put you and your business in a much safer and stronger position. So if one of your banks happens to reduce or even cancel your business credit line, you still have several other credit lines readily available.
One word of caution: Don’t open more than three bank accounts within a 90-day period because your business could possibly get stuck in ChexSystems.