Bank of America recently made headlines about cutting credit lines of some of its small business customers. An article in the Los Angeles Times quoted two small-business owners (and alluded to some others) that had their lines of credit cut off by Bank of America.
Meanwhile, Bank of America officials denied that their action pertaining to small businesses is widespread. Instead, they claim that it impacts “a very, very, very small percentage” of its small business customers, according to bank spokesperson Jefferson George, as quoted in a Huffington Post article. And they still have 3.5 million non-mortgage loans to small businesses on the books.
While Bank of America said it notified the borrowers who were affected by the call on their lines of credit far in advance, some borrowers who were interviewed said they received no such notification. Those Bank of America small-business customers claimed they were caught by surprise, and unable to pay off the loans or find replacements as quickly as Bank of America was demanding.
But I wondered, is this shades of 2009 all over again, where we can expect to hear tales of small business lending woe everywhere we turn? Are we going to see an across-the-board pullback by lending institutions even deeper than we’ve experienced in the past few years? Or is this an issue specific to Bank of America? Let’s take a look at some additional information.
MultiFunding’s Small Business Bank Report Card shows that small business loans held by banks were reduced by $4.84 billion in Q3 of 2011. The loans that Bank of America called in equaled 8.5% of that alone.
While Bank of America had the largest reduction of small business debt in Q3, loans are still available, experts say, but it all depends on where you look for financing.
Says Ami Kassar, founder and CEO of MultiFunding, smaller community banks are still very much viable options for small business owners looking for financing. “There are plenty of community banks aggressively building their small business loan portfolios across the country,” he notes.
Others also emphasize sources other than big banks for small-business loans. Rohit Arora, CEO of Biz2Credit, reports that his company is not seeing an across-the-board pullback on lending. He notes, “Biz2Credit is seeing an increased confidence among small business owners and an increased interest among small to mid size banks along with alternative lenders to lend more aggressively to businesses.”
In other words, Bank of America’s action doesn’t mean credit is completely drying up. But credit is still tighter than other times historically. You may have to be more creative than ever in where you look for funding. Look to your local community banks. Look to mid-size regional banks. Examine alternative small-business financing options as pointed out in an article here on Small Business Trends last month. In addition to traditional banks, consider approaching:
- Credit unions
- Community Development Financial Institutions (CDFIs)
- Accounts Receivable (AR) financers
- Microlenders
Money Questions Photo via Shutterstock
Hmmm, sound like BoA is getting rid of more risk. Stashing back for something big coming?
I thought all this was a thing of the past. Hopefully it isn’t contagious. Thanks for bringing this to our attention.
@scotty– who knows? Here’s hoping its good.
@kip–it’s looking pretty contained at this point.
Susan
Small business lines are definitely a target for closure by banks. This is not just a practice by Bank of America but by many other large banks. They have done this over the last few years and it has helped to put the small business closure rate on the uptick.
When small businesses are having financial difficulties, they rely heavily on their lines of credit. This is not what banks want to see. With banks being totally risk adverse, they are pulling lines when their small business clients have excited the maximum base line usage. It is the reality of banking sector, so expect to see more.
@Karlene–
Thanks for your insight. I guess alternative financing is a viable option if the lines of credit are what’s causing problems.
Susan,
Thank you for your thought provoking article. A business owner with a line of credit should be aware of the possibility that their bank may call their line at any time or not agree to renew it at its’ expiration. The bank’s ability to call the line for full repayment is defined in the line of credit documentation. It should be noted that not all agreements permit the bank to do this.
In recent years, many business lines of credit were called and/or not renewed when the business accounts receivable balances were shrinking. This happens when the business’s gross revenue declines and unfortunately was very common during the height of the recession. Typically the Accounts Receivable serve as the line of credit’s collateral.
I truly sympathize with business owner’s facing Bank of America’s actions. For other business owners, it is good practice to fully understand what your lender can and cannot do with regard to calling the line and renewing at expiration. I encourage business owners to read the agreements and ask your banker.
Many thanks for bringing this to the attention of readers Susan!
All the best,
Holly Magister, CPA, CFP
http://www.ExitPromise.com
@Holly–
Thanks for the info! I suspect many of us glaze over the documentation and miss that key fact!
Susan
Having had an issue with BofA for a home line of credit I believe the owners when they say they were not informed. I was told a month AFTER they closed my line that they were -going- to close it. It did not affect us as, we were not leaning on it, but I could imagine those that had auto payments direct from their line were up the creek without paddles – incurring late fees or worse. I couldn’t see any great change in BofA for how they would treat a business owner. Customer service and respect – Whats that?
In 2009 or so they cut a business credit card I had with $25,000 credit line down to $2,500. I thought all that was over with and they were back on the “growth track”