What Happened to My Bank Line?

If your bank pulled your line of credit, you’re not alone. And don’t think just because you haven’t gotten the call yet, that you’re immune. The fact is that banks are failing in record numbers. The FDIC won’t renew your line. If you have any equity at all in your accounts receivable, there’s never been a better time to preserve and enhance your funding capacity against your accounts receivable. Your best bet: have a factoring company take out your bank line.

Let’s examine the current dynamics of the banking industry. Banks are seeking to cut back their unfunded commitments, because they must reserve against those commitments even though they are generating no interest income. Banks are scared that their borrowers will draw down on availability just to preserve cash, even if it means borrowing more they can afford. This means your banker is likely reviewing your loan and determining if there is any portion of your line of credit that is not drawn and waiting for the moment to inform you that your line is being reduced to the funded amount. At the same time, there is a liquidity crisis in North America’s banking system. Banks need to shed assets to raise cash. That means your line of credit may be the next to not be renewed.

If you’re one of the lucky ones, the value of your accounts receivable exceeds the amount you owe on your line of credit. You have options. One option you may consider is showing your accounts receivable aging report to a factoring company. Factoring companies are experts at quickly evaluating the loan value of your accounts receivable and typically they will approve an advance rate against your receivables that far exceeds what your bank has lent you.

Interstate Capital, for example, is a factoring company that has evaluated thousands of accounts receivable aging reports for companies that have borrowed money against their accounts. Typically we find we are able to advance 10% to 15% more than the bank. So how does it work.

It’s simple. Your factoring company will determine how much money they will advance against your invoices that are already in the hands of your customers but which have not yet been paid. The factoring company will ask your bank for a statement detailing the amount outstanding under your line of credit, plus the accrued unpaid interest. If the amount of money the factoring company is willing to advance is greater than the amount you owe the bank, the factoring company will wire your bank the pay off amount and send the difference to you.

As your customers begin paying those invoices, the funds will go to the factoring company instead of going to your bank account. To generate cash flow, you will begin factoring your new invoices.

This process may raise considerably the amount of funding available to your company in thes very uncertain financial times. Don’t put the future of your company into the hands of an anonymous loan committee at your bank. Your accounts receivable are one of your company’s most valuable assets.

There is a twist to this process. Sometimes, your banker may be willing to negotiate their lien position in your accounts receivable. This is not unusual, particularly in cases where the bank has other collateral that covers the outstanding balance on your loan. Banks like to take “blanket liens” covering all the assets of your business, but often will relinquish some of that collateral if the bank believes they are “covered” by the rest of it. In situations like this, the bank may be willing to subordinate their lien in certain accounts receivable or up to a limited amount of all your accounts receivable. In some cases, the bank will subordinate its security interest in ALL your accounts receivable if there is enough excess coverage on the rest of the collateral.

Finally, even in particularly stressed situations, the bank may consider signing a “consent letter” in which the bank will retain its security interest in all it’s collateral, but agrees that the borrower may factor certain invoices in exchange for the factoring company agreeing to send the proceeds of the factored accounts to the client’s bank account under control of the banker. Generally, the bank signs a new consent every time the borrower wishes to factor a new batch of invoices. This process usually takes place once per week.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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