Resources | Working Capital | November 10, 2023

Warning Signs That You’re About to Lose Your Line of Credit

Don’t let it catch you by surprise. Take action before your banker pulls the plug. 

warning signs that you're about to lose your line of credit

Don’t let it catch you by surprise. Take action before your banker pulls the plug. 

It’s the kind of fear that keeps business owners up at night: What if their bank decides to reduce or even completely pull their line of credit? 

Many companies rely on their credit line to fund payroll, inventory and other must-haves. Losing the credit line can mean a difficult, potentially catastrophic drop in working capital. 

And it’s a particularly bad time to lose that resource. The US Federal Reserve and the European Central Bank are both reporting tighter credit conditions among lenders. Almost 80% of small business owners say they’re concerned about being able to access capital, according to the most recent Goldman Sachs 10,000 Small Business Voices survey. Nearly 30% say they can’t afford a loan under today’s interest rates. 

Losing a credit line can happen to anyone, even a company like Nike. Early in its history, the shoe company was dropped by its bank. Fortunately, Nike had found a non-bank lender that offered it a new credit line and was willing to provide additional funds so Nike could keep growing. 

In this post, you’ll learn how to spot the warning signs that your lender may end your credit line, possibly months before it happens, so you can find a new funding source before you need it. 

3 signs your bank is about to pull your line of credit

1. Your lender starts giving you more (or less) attention than normal 

Keep an eye out for changes in behavior because that’s how it usually starts, according to Mike Coleman, vice president of sales for C2FO’s Capital Finance team, which offers asset-based lending. 

Your banker, who used to call a couple of times each month, stops checking in. Or it can go the other way: You might begin receiving more inquiries as your bank asks about due diligence items more frequently. 

2. Your lender becomes less flexible

Your lender isn’t as willing to offer additional capital or make other allowances. Instead, the lender starts referring to your contract and reminding you about your obligations under the agreement. 

Almost as if the bank isn’t worried about you taking your business elsewhere.

3. Your business no longer fits your lender

There are two ways this can happen. 

Your bank is too big for you 

Some of the nation’s largest banks aren’t lending directly to small and midsize businesses to the degree they once did. Instead, they’re going “wholesale” by making loans to other alternative, non-bank lenders and letting them lend directly to small and midsize businesses, so those lenders can assume the credit risk. 

You’re too big for your bank

Smaller community banks will sometimes push out business borrowers that are too big or growing too fast. 

If you’re the bank’s single largest depositor, or if you have the bank’s single largest credit line, that will scare your bank because too much risk is concentrated in a single business. As a result, the bank could trim or eliminate your line. 

“They’re nervous about what’s going on in the credit markets, so they’re tightening credit,” Coleman said.

Some people have a stigma about getting pushed out by their bank, Coleman said. But it can be positive if it leads you to a new partner that offers not only capital but also expertise that can help your business better manage its finances and growth. 

“In the case of Nike, it was the thing that saved them,” he said. “Not only saved them, but actually accelerated their growth.” 

What businesses should do if they think their bank is about to cut them off

Don’t wait to find a new partner

You probably won’t receive an explicit warning that your bank is about to reduce or end your credit line. Most lenders will not give you a heads-up.  

“Based on my 20 years in the financial services industry: If you feel like your bank is pushing you out, they probably are,” Coleman said. “It’s probably not going to be tomorrow, but it’s probably three to six months out, and you need to get started on finding a new partner.” 

Find the right fit

Start looking at other lenders ASAP, and make sure they’re a good fit for your company’s growth trajectory and needs.

“A company doing $100 million in revenue probably shouldn’t be coupled with a small community bank that doesn’t have a ton of deposits to lend out because, from a concentration standpoint, that puts that bank at risk,” Coleman said.

While lending capacity is important, don’t overlook the importance of working relationships. You deserve partners who understand your business and are trustworthy. 

Explore options outside traditional lenders

Companies can generate more working capital through dynamic discounting or receivables financing. In many cases, the cost of money may be less than paying interest on a traditional bank loan. 

The bottom line about losing a credit line

Losing a line of credit is often a big setback for a business. But it can also be an opportunity for leadership to find better options for funding. The key is to understand the warning signs and take action as quickly as possible. 

If you’re looking for a new partner, C2FO can help. Our platform lets businesses request early payment of their invoices in exchange for giving buyers a small, customized discount. And our Capital Finance team can help you tap into a wide range of affordable, convenient lending solutions.

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