Are You at Risk if Your Bank is Under Stress?

Are you safe in the event that your bank limits or restricts your borrowing or lending abilities? Most people aren’t, which is why you should know more about the resources you have in the event of an economic downturn, or better, before you find yourself in a hole you can’t get out of.

Start by reviewing your lines of credit, here are a few things you should be aware of:

Most lines of credit can be reduced or eliminated at the discretion of the bank.

When is your annual review up next? If you have an outstanding balance, make sure to review your terms to know what might be at risk. Do the math and make a plan in the event that your credit line is compromised. Generally, 6 months of capital is a good place to start. Building your savings to offset potential limits on your line of credit could save your business.

Putting high-priced equipment on a line of credit can jeopardize the financial health of your business.

If you plan to buy any large equipment, avoid using your bank line of credit. It’s the fastest way to tie up your cash (into a depreciating asset no less), and put yourself at risk from being able to access more capital in the future. When you’ve used a large percentage of your credit line, and then need more capital, you’ll find yourself limited in ability to get that needed cash.

Instead, look to finance equipment purchases with a direct lender, like American Capital Group. Equipment financing breaks the cost of your purchase into smaller monthly payments which prevents you from tying up all your cash into an asset and leaves your financial sheets looking more favorable for other borrowing. Learn more about the benefits of equipment financing here.

Often times lines of credit have blanket liens and covenants that restrict you from being able to freely access money or move assets

While you may have a line of credit for $100,000, written in that stack of loan document pages you may find a covenant written that either requires a certain debt to asset ratio or a minimum amount of cash that must remain in the account. Thus restricting how much of that $100,000 you actually can have access to at any given time.

Say you decide to sell an older piece of equipment hoping to free up some cash, make sure to check with your bank first to ensure that they will allow you to sell that or any piece of equipment, as it may fall under a blanket lien that was written into your loan agreement, restricted you from selling any asset without the banks permission.

It’s easy to rely on the bank during times of prosperity, but in times of crisis, when fearing for your business’ survival, understanding and making the right decisions on how to use and not use your line of credit is imperative. The best thing you can do is not tie up any of your bank lines and leave yourself room to use your lines of credit for expenses like payroll, marketing, or bridging a cash flow gap.

After reviewing your line of credit and recognizing that you could use additional resources for funds your business, American Capital Group is happy to give free consultations to discuss equipment financing options currently available for businesses during this economic uncertain time. Click here for a free consultation.

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