Many small businesses are being swept up in the banking community’s efforts to tighten up their credit facilities. Banks all over the country have begun to inform their borrowers that they are out of compliance with their notes. Obviously this comes at a terrible time and is compounding small companies’ attempts to stay in business. As revenues decline on a business balance sheet, the collateral used to borrow capital has decreased forcing the bank out of their regulatory role of making sure the loan remains liquid. The bank, when it first considers making a loan finds that there is a.) enough liquid collateral available to satisfy the note and b.) the profit margin is strong enough to make monthly payments.
As the economy suffers, the collateral and balance sheet weaken. It seems the banks decided to tighten up their credit standards in the beginning of 2012. They are asking small businesses with a line of credit to pay off the line completely before being able to borrow again. This allows the bank to know whether the business has the wherewithal to pay off the loan. It shows the bank that the small business has other assets and good judgment. This process will undoubtedly weed out a lot of companies that are barely hanging on and are grossly undercapitalized.
Small companies that secure a line of credit with a bank should be using a greater amount of discipline when accessing this form of capital. You should never take money out of a line of credit without having a plan to replace it. This discipline of taking money out and putting it back in keeps you in compliance and actually increases your credit rating. The lender sees the track record of borrowing and payments and deems the credit risk acceptable. Unfortunately, many companies see the line of credit as way to defer the inevitable. A bill needs to get paid. Using a line of credit just makes the date it gets paid sometime later in the future.
With invoice factoring all of this becomes moot. Factoring does not have a limit of how much you can borrow, you don’t have to worry about paying off the note because each invoice acts as its own loan. Once the invoice is paid the note is satisfied and you move on to the next one. So the factoring company provides the discipline and the small business can stay out of trouble.