What to do when the bank pulls your line of credit

"Having $7,500 in reserve really helped," Weber says. "In case a check didn't go through from a client, it was there to rent studio lights or pay my cell phone bill."

 

Then last spring--a few months before  declaring bankruptcy--Advanta pulled the credit lines of 1 million small-business customers, including Weber. It also capped their credit cards at the level of their outstanding balances, effectively cutting off their access to emergency cash.

 

"I was suddenly working without a safety net," he says. Like many small-business owners, he depends on timely payments from clients to pay his own bills. But in this economy, invoices are stretching to 60 days or longer. "My wife and I are paying the mortgage on our home and making payments on one car," Weber says, "and we have a 6-month-old daughter. Some months, I receive $5,000 from a single commercial client; other months I'm lucky to get two checks from magazines for $400 each. It's very stressful trying to meet our monthly costs with no backup funding."  

 

Millions of small-business owners are suffering through the same predicament – and worse – as unprecedented numbers of banks pull back or cancel credit lines. In the first six months of last year, 38 percent of small businesses reported a decrease in their lines of credit or credit card limits, according to the National Small Business Association. More than 40 percent of small-business owners who had requested extensions of their credit lines were turned down, the National Federation of Independent Business reported, and many of those who received extensions were required to increase collateral, pay higher interest rates and/or agree to more stringent terms.

 

"A few years ago, losing a line of credit was a crisis--today, it's the new normal," says Marilyn Landis, a board member of the NSBA in Washington, D.C. "We business owners have burned through our personal savings, seen our credit card limits go down as our interest rates go up, and now our bankers are taking away our credit lines. But we still have customers who will pay us in 30 days and employees who expect to be paid every two weeks."

 

Losing credit suddenly can devastate a small operation. "Now I'm trying to keep my company running while I look for another bank to take on the $160,000 I still owe," says a Colorado technology consultant who asked that his name not be used because he is afraid of jeopardizing his relationship with his bank--the same bank that had courted him three years earlier and offered him a $250,000 line of credit, and pulled it entirely for 2010.

 

"It drives you crazy. I'm doing a good job, I'm still making money, and if I can't find a new bank to take on my credit line, I could be forced into bankruptcy," he says.

 

Even as the economy improves, the credit markets will remain tight through 2010. Forecasters predict that the home mortgage crisis will be followed by a similar crash in commercial real estate. "Until this sorts itself out, banks are caught between a rock and a hard place," Landis says. "They want to support local business but know that state and federal regulators will come in to evaluate their loan portfolios. In the name of making banks better, they are being forced to turn down loans because of collateral or credit scores they would have accepted previously." Many economists predict little easing of business credit until sometime in 2011.

 

In the meantime, what's a small-business owner to do?

 

Entrepreneur talked to financial experts, borrowers and lenders to analyze the options and find ways to cover monthly shortages, pay employees and simply stay in business.

 

We looked beyond the troubled national banks, such as Citigroup and Bank of America, which have cut way back on business lending. (CIT Group, the institution most friendly to small business, declared bankruptcy in November.)

 

We discovered that money may be available from local community banks or, surprisingly, local credit unions. Less surprisingly, a variety of alternative lenders has stepped up to offer a mix of loans based on your outstanding bills, daily credit card receipts or future purchase orders. You can even use your retirement funds to pay your rent. Many of these products carry fees and most charge interest rates that, in pre-recession days, would have left you gasping.

 

"It's become the wild west of financing outside the traditional realm," Landis says. "Be really careful."

 

Read the rest of the story here.