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Snipping Credit Lines for Small Businesses

By AMY BARRETT, BUSINESSWEEK.COM
Posted: 2009-05-08 11:32:21
Filed Under: Small Business, Small Business Finance

Cutting credit
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BusinessWeek

JPMorgan Chase and others are shoring up balance sheets by reducing or eliminating these financial lifelines to entrepreneurs.

For small business owners, a line of credit can be a lifesaver, giving them a buffer against cash-flow problems and enabling them to handle regular expenses such as payroll. But beginning in March, according to documents obtained by BusinessWeek, JPMorgan Chase suspended credit lines for a large number of business owners. According to someone familiar with the matter, the move affected thousands of businesses. They had been clients of Washington Mutual before Chase bought the ailing bank in September 2008. The documents show that Chase tasked a special group inside the bank with responding to inquiries from borrowers.

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    The bank can expect plenty of those, at least partly because in many cases the businesses whose lines were cut had not missed loan payments. Instead, their credit score or their financials had deteriorated, and credit-line agreements typically give banks the right to change the terms of the line if there is a change in the borrower's financial situation. In this case, the changes in the terms are dramatic. If business owners can't convince Chase of their creditworthiness, they have three options: 1) pay off the balance in full; 2) agree to a conversion of the line of credit into a term loan; or 3) go into default.

    Business owners who accept the conversion to a term loan will likely see dramatically higher monthly payments. A business owner may be able to keep a line of credit open with interest-only payments, but term loans typically have to be paid off -- interest and principal -- within three to five years. Plus, they may carry higher interest rates.

    Aggressive Review
    Thomas Kelly, a spokesman for Chase, says the bank continually reviews the lines of credit in its portfolio. "We contact customers if we determine there has been an adverse change in their financial condition or credit history. We may eliminate the unused portion of their credit line and set up a standard repayment plan." Kelly says the bank encourages customers to contact Chase if they want the decision reevaluated or if they want to provide information such as their federal tax return. And he says the bank has assigned staff to work with customers who want such decisions reexamined.

    Donald Raftery, managing director at Greenwich Associates, a Stamford (Conn.)-based financial-services consulting firm, says the banks, overwhelmed with problem loans, are "trying to take a very active approach on a broad segment of companies. There's no individual type of approach. [Small companies] feel like they're being treated like a number."

    Mark Fitchett, the owner of $300,000 music school operator L&M Music in Long Beach, Calif., would certainly agree. He had been a Washington Mutual customer before the bank was acquired by Chase. He had four overdraft lines of credit of $10,000 each, one for each of his schools and one for the parent company, and has been drawing on them at the beginning of each month to help pay the music instructors that contract with his company. In late April, Fitchett was checking his account online and noticed that two of the lines were not showing up. That day a letter arrived saying that, due to an adverse change in his "financial condition and/or credit history," Chase was blocking him from drawing on those two lines. Fitchett said he called Chase, but still doesn't understand what change prompted the move. He's trying to get the lines reinstated, but he's also shopping around for a new line. "I'm thinking now about how I'm going to cover the first week [of paychecks] next month," Fitchett says.

    Broader Phenomenon
    The phenomenon may extend well beyond Chase and its borrowers. "I'm hearing it more and more," says Stacey Sanchez, senior community loan officer with San Diego-based CDC Small Business Finance, a community development corporation, who says entrepreneurs often turn to her institution when their credit lines are pulled. Sanchez says the increased aggressiveness on the part of lenders may be due in part to banks now being in possession of 2008 tax returns for most of their clients, which show the full ugliness of the last quarter of 2008.

    And suspending lines of credit is certainly an efficient way to reduce the risk on a bank's balance sheet. According to officials at the Office of the Comptroller of the Currency, bank reserves for bad loans are based on the total exposure to a customer. So if a bank has a $100,000 line of credit with a small firm and only $20,000 is drawn down, the total exposure is still $100,000, and the bank usually will reserve for loan losses based on that amount. But if they convert the $20,000 outstanding to a term loan and cancel the line of credit, or if they simply cut the line to $20,000, the reserves would be based on that $20,000 figure.

    Regulatory pressure likely plays a part as well. Bert Ely, an Alexandria (Va.)-based financial-services consultant, says he hears repeatedly from banks around the country that while the White House and Treasury talk about the need for lending to small business, local bank examiners continue to pressure them to upgrade the quality of their loan portfolios. "You have a disconnect between what policymakers are saying and what the rank-and-file bank examiners and supervisors are saying," Ely says. That has painful repercussions for business owners around the country.

    Barrett is a senior correspondent for BusinessWeek SmallBiz.

    2009-05-08 11:15:32
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    apexdebt 12:15:28 AM Jun 11 2009

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    I negotiate with these piece of garbage lenders for a living. In a nutshell they're thieves that prey on the weak and ill informed clients. I find great joy in negotiating them into a corner and giving their future earnings back to the people that they've been taking advantage of for so many years. More often than not, I'm negotiating your account(s) with someone named Billy, Jeffrey or Tommy albeit they're in Mobai India or Manilla Phillipines. Pathetic how American Express hardly has an American representing them. If you're in need of help w/your cars or mortgage. Contact me at: APEXDEBT@AOL.COM

    sloughrealestate 09:35:22 PM Jun 10 2009

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    JPMorgan-Chase circumvented the intent of new credit card legislation by essentially "blackmailing" its current cardholders ---- you can keep your existing credit line but we will double the interest on what you already owe (as well as new charges), or you can "opt-out" by closing your credit line and keep your existing interest rate. Since closing the credit lines results in changing the ratio of available credit to current debts the "Blackmail" = pay up on the interest rate, or take a big hit on your credit report. I opted for the latter, and so far two other sources of credit have already reduced the amount of my available credit (i.e., they cut my credit lines because of the change in my "ratio" after "opting-out" with Chase).The banks are steeling themselves for huge losses in their credit card divisions. But these strategies will result in losing their strongest business clients. And the reductions in available credit will make credit cards defaults more liklely --- it's a self-f

    nationtom 04:02:30 PM Jun 10 2009

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    Bank of Am bank gave my business a credit line of 25 k i used about 18 k to pay for office equipment, web site expense ect.. made payments on time..usually double what was due i had an empergency expense at work....i owed about 14 still they refused to allow me to draft any money no reason they said no. bastards. the banks will get theirs in the end

    justbeds01 03:17:03 PM Jun 10 2009

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    Banks are nothing more than legal theivery. I have a 20 year old college student. We send him about 50 to 80 bucks a week thru online transfers. He used his debit card for a 5.35 purchase and was charged a NSF fee of $35 !! The real clincher here is that his account never went below a positive balance of $12.14 !! he took his print out to the bank.. and was told TOO BAD.. it was because of how the credits and debits lined up over the weekend. EXCUSE ME? I eventually had to get involved and did get his money back but only after having to threatening withdrawal of all of our accounts. Needless to say.. the 20 year olds of today.. will certainly not want to use banks in the coming years..

    jembenz 03:01:59 PM Jun 10 2009

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    A FRIEND OF MINE WHO PAYS HER BILLS ON TIME EVERY MONTH SAW HER INTEREST RATE CLIMB FROM 9.9% TO 36.9% IN ONE MONTH. iT'S THE GREAT aMERICAN RIPOFFS BY THE BANKS.SHE DID WHAT MOST OF US SHOULD DO. TELL THE BANK TO TUCK IT WHERE THEIR MOTHER NEVER KISSED THEM. WE HAVE LIVED WITHOUT CREDIT CARDS BEFORE AND WE CAN DO IT AGAIN. i CUT UP MY 3 CARDS. I DON'T NEED THEM. IT INVITES YOU TO LIVE BEYOND YOUR MEANS. CUT YOUR CARDS UP. AND SEND THEM BACK TO THE BANK.

    shipshape97 03:00:14 PM Jun 10 2009

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    CitiGroup cut my credit line from $6000 to $2900 when I owed $4100 and had never missed a payment. Now they demand an immediate payment of $1450. I can probably manage it, but my new ambition is to reduce my debt to zero and dump Citigroup as a source of finance for my business.

    rsim494202 02:14:25 PM Jun 10 2009

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    The Banks are awash in DRUG PROFITS...The TARP funds are the perfect way to LAUNDER the DRUG MONEY..There is no way that the illegal drug industry could flourish with out the aid of U>S> BANKS People in very high places ACT like they have no idea what is going on...But then we find out that they are suddenly worth hundreds of millions of dollars...WOW I wonder how that happened ? After 911 it would be only logical to shore up border security...BUT NO...WHY DRUG PROFITS, and DRUG LOBBIESTS..Washington is swimming in DRUG MONEY. All of are wars are fought over drug routes or oil...Nobody in the government gives a shit about Freedom, it's all BS. Money Talks, period. LOBBYING needs to be BANNED outright and the politicians need to start working for the people instead...Most of these scumbags belong in federal prison not living in mansion's. Marijuanna should have been legalized in the late 1960's, BUT the drug and tobacco lobby have kept it from ever happening because then nobody

    stknrocket 01:31:49 PM Jun 10 2009

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    "Thomas Kelly, a spokesman for Chase, says the bank continually reviews the lines of credit in its portfolio. "We contact customers if we determine there has been an adverse change in their financial condition or credit history. We may eliminate the unused portion of their credit line and set up a standard repayment plan."THIS IS A LIE! THEY DON'T CONTACT YOU THEY JUST DO IT. THEY SENT ME CONVENIENCE CHECKS WITH A 2.99% TEASER RATE. MY STEMENT REFLECTED CREDIT AVAILABLE OF $5,700. I WROTE CHECKS A DAY AFTER MY STATEMENT CAME OUT ONLINE. CHASE WOULD NOT HONOR THE CHECKS AND SIMULTANEOULSY CUT THE CREDIT LINE AT THE POINT THEY WERE PRESENTED BY THE PAYEE. NOTIFICATION CAME A WEEK LATER FROM CHASE. I HAVE ALWAYS PAID THE BILLS ONLINE AND ON TIME LITTLE MATTERS.

    bozgirls 01:23:07 PM Jun 10 2009

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    WE ARE ALL IN TROUBLE EXCEPT THE POOR LAZY PEOPLE LIKE OH NO OBOMB MA NO WORK, FREE FOOD STAMPS , CIGS, BOOZE, FREE HEALTH INS. , FREE FREE . SORRY I HAVE TO GET BACK TO WORK......MMMMMMMM WHAT A GREAT DATE IS WAS TO PUT (IT ) IN OFFICE TO RUN THE COUNTRY SORRY DAY...!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    vlanza2172 12:23:56 PM Jun 10 2009

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    I have two credit lines that were converted into term loans. They told me it was because of my credit reports. I have never missed a payment with these banks. My monthly payments went from $900.00 per month to $2,600.00 per month. If they were worried about us defaulting on the loan why almost triple my payment obligations ? I guess thats why these banks are in trouble. No common sense !

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