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.

 

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