Top 3 Reasons Why Banks will Close a Small Business Credit Line

By Karlene Sinclair-Robinson

Small businesses access to credit lines is still stagnant. Entrepreneurs continue to face tight credit and limited access to loans. Some business owners who once had excellent credit are now facing financial strains. This is due, in part, to the decline in business sales or other opportunities. This could also be due to the cost of goods or services, in order to perform at their best.

Business owners are now facing another dilemma: they are facing canceled credit lines. This issue has affected many small business owners. They figured they would still have their credit lines to keep them afloat through the lagging economy. This is not the case. Banks are wary of businesses using credit as a stop-gap measure when cash flow is low or nonexistent.

What many business owners do not realize is the process that banks use to monitor their clients. Banks have processes in place to monitor how funds flow through a business. These internal processes allow the banks the opportunity to know when their risk exposure has been elevated. They are then able to put measures in place to reduce their exposure to default by business owners.

Here are three (3) reasons why banks will close your line of credit:

1.  Current Credit Status – Banks will check your credit from time to time. This process varies per bank, but know that they do check. Even if you have great credit, they are still going to check it. Some banks will assess both your business and personal credit at least every six months or so. If there are any negative changes, this will alert the bank to your financial position, or show them a pattern of what the future possibilities could be. Once your credit takes a nose dive, they can and will reduce or cancel your credit line. The bank will likely notify you, hopefully in a timely manner. Be sure to read all the mail you receive from your bank. You just never know what they will change.

2.  Credit Line Usage – Even with great credit, a bank that does not feel comfortable with your spending habits can choose to close out or reduce your credit line. Since banks monitor your credit, this means that they are also monitoring your spending habits. If your balance is consistently over a third of line and they see this as a pattern on your other open credit lines, they can and will take action.

3.  Changes in Line Terms – Banks often make changes to their contractual terms. This could be due to regulatory or internal changes. If there are new laws, then the banks must comply. If the bank is experiencing a lot of credit line defaults, they can implement changes to alleviate their risk exposure. You should be notified of these changes with time for you to respond.

If you have a credit line and you use more than one-third of line value regularly, you need to pay close attention to your credit and spending habits. Checking your credit will tell you who has accessed your report in the last year. To avoid your line being exposed to this closure issue, reduce your balance or pay it off as quickly as possible.

Do You Know Your Breakeven Point?

By Karlene Sinclair-Robinson

An episode of the popular ABC TV show “SharkTank” presented the opportunity to focus on a critical area of a business – its breakeven point. Business owners seeking venture capital on the Shark Tank program could not effectively present their breakeven point.  This is all too often the case for business owners. Some startups and business owners have never heard of their breakeven point, or do not have a clear understanding of how to come up with the figure it represents.

This might astonish many who are versed on business planning and developing enterprises. Unfortunately, since there are so many startups annually, many of these individuals are not getting the training necessary to develop these core business competencies.

Breakeven Point

The breakeven point refers to the minimum amount of money a business must make to cover its monthly expenses.  If you are paying out more than the company is generating, then you are not breaking even. Of course, if you are making more money than is needed to pay your monthly expenses, then you are “Cash Flowing”.  Remember, “Cash is King”.

This is vital to whether your business can be operational or not. If you are consistently operating below this point, you must consider alternatives. If you are not careful, your business could turn into an expensive hobby.  You did not go into business to be consistently putting money down the drain. Knowing what the breakeven point is for your business will help you strategize on how to increased sales.

Breakeven Analysis

You cannot always be putting your own money into the business. It should be paying you. In order to make changes, you must address the areas of your business that are affecting your bottom-line. For you to come up with your breakeven point, you must complete a comprehensive “Breakeven Analysis”. Once you do, you will have a dollar amount to keep in mind that you must make monthly in order to survive.

 EXAMPLE

	Cash Flowing	Breaking Even	Not Breaking Even
Sales	$5,000	$5,000	$5,000
Expenses	$4,000	$$5,000	$6,500
TOTAL	$1,000	$0	($1,500)

 The above example shows that the breakeven point is $5,000.

The breakeven analysis should take into consideration your products and/or services, cost of goods, along with all fixed and fluctuating expenses. This can be found by reviewing and updating your cash flow projections. This will give you a baseline to use in order to come up with that monthly amount you must make to breakeven point.

The breakeven point is the most important aspect of your business and financial plan. If you need additional training or resources, check with your local area S.C.O.R.E. office, Small Business Development Center or Women’s Business Center.