Many businesses have seen their line of credit (LOC) cut since the recession, because banks have unilaterally scaled back risk and restructured asset allocations to meet new federal compliance standards. In many instances, a credit crunch can reduce your line of credit by more than 50%, even if you have great credit and your business is strong. In other cases, companies are forced to close their accounts altogether and the bank will offer a term loan to pay off the remaining balance within 1-3 years.
If your business line of credit has been slashed, don’t panic. You still have plenty of other options. Remember, the bank loses money if you default on the outstanding balance or if your account is sent to a collections agency. Use this leverage to push for better terms. At the same time, make your banker’s life easy. As a good client, you are less likely to see your access to credit decreased. In some instances, you may be able to maintain the line of credit and reduce the interest rate by securing the line with company assets.
In the rest of this article, I will outline what your other financing options are, and how you can leverage online business funding to get the best offers in short order.
Benefits of a Business Line of Credit
A business line of credit is normally used to:
– Manage cash flow
– Pay bills
– Repair equipment
– Purchase inventory
– Cover receivables from customers who are slow to pay their invoices
Lines of credit are essentially unsecured loans that do not accrue interest (unless they’re being used). Rather than underwrite small business loans each month, banks prefer to offer a line of credit with a flexible payment schedule. Similarly, this allows the business owner to focus on growing their business, rather than securing a loan each month.
Lines of credit are particularly useful for companies who experience unexpected swings in cash flow, providing access to capital during lean periods, or when unexpected delays in payment occur.
Where You Should Go Next
Online business funding is becoming increasingly popular, and is proving to cut costs for the business owner and investor. Once you sign up with EquityNet, a member of our team will help you connect with the best capital providers for your situation – whether you need an equity investment, a loan, or both. Rather than shop for investors one by one, EquityNet showcases your offering to thousands of investors and lets you pick the best offer.
Other Loan Options
Community banks or credit unions
If you line of credit has been cut, or if you cannot get approved for a line of credit, your first stop should be a community bank or credit union. Rather than adhering to rigid underwriting criteria, community lenders are more willing to take into account a proven track record of revenues and a clean payment history. Build a relationship with the banker by letting them get to know you, your industry, and business model. Get to know their parameters as well, and tailor your ‘ask’ to fit the bill.
For example, if your business is in serious trouble unless you get access to $500k, but the bank’s ideal loan size is $250k, they may not be willing to lend to you until you come up with the other $250k. If this is the case, coming to the table with access to the other $250k from other sources will increase your probability of securing a loan with a good interest rate.
Next, you should consider obtaining a term loan. Term loans typically have lower interest rates than lines of credit, but often have limitations on the use of proceeds. In addition, term loans often restrict prepayment, preventing the lendee from paying back the principal of a loan faster than the payment schedule outlined in the contract. However, even with the prepayment restrictions, term loans will normally be cheaper than merchant cash advances or missing out on a substantial growth opportunity due to limited access to capital.
Factoring / Accounts Receivable financing
If you have struck out with community banks and term loans, you still have options. Often, a cut to your line of credit is a sign of a wider credit crunch, making it difficult for a small business owner to secure a community bank or term loan even if their credit score is north of 700. Fortunately, there are other forms of debt financing that are still accessible to many small business owners.
One option is factoring, which means selling your customer invoices for cash. You sell your invoices to a factoring company. The factoring company is then reimbursed when your clients pay the invoice. The amount of cash you receive will be less than dollar amount of your invoices, but without access to cash, you will likely face bigger problems. And in any case, if your clients pay their invoices 100% of the time, you will be able to negotiate better rates from factoring companies. There are a number of companies who factor receivables. You can find out which is best for you by speaking with a member of our team.
Purchase Order financing
Similar to factoring, many business owners strike out with traditional funding options and do not know where to go next. If a bank is cutting your business line of credit, economic forces may be creating too much of a headwind to secure traditional forms of financing.
Your business may qualify to take advantage of purchase order agreements. These agreements provide capital upfront to a business and are used to fulfill a purchase order (PO). The financing company provides the business owner capital to manufacture and deliver its product to a client. Because the interest rates are charged monthly, the longer it takes to manufacture and receive payment from your customer, the more expensive a PO agreement is. Purchase order agreements work best for businesses with high margins, short manufacturing time, and customers that pay quickly.
Creative, Alternative, and Specialty lenders
If you strike out on traditional loans, and factoring or purchase order agreements are not a good fit for your company, there may still be possibility of getting a loan. Creative and speciality lenders may still be interested in lending to your company. These lenders are not constrained by rigid underwriting parameters of banks and traditional lenders. In fact, some creative lenders offer better terms than traditional lenders. Business funding companies, like EquityNet, can help reduce the search costs associated with finding and establishing a relationship with the right creative lender.
Every entrepreneur’s needs are going to differ, and there is not a cookie cutter solution for everyone. By knowing your options, you can leverage EquityNet to bring traditional and private funding options to the table and choose the offer that is best for your business.