Don’t Just Accept Credit Changes as Final
Goal: See if there’s some way to salvage the situation.
Whenever you’re faced with an unfavorable change in your credit situation — the bank that hosts your day-to-day operating expenses decides to lower your credit limit, for example, or your credit card company hikes interest rates — it pays to talk to the lender directly. If your company is in good standing and you can prove you have the wherewithal to keep current on your payments, you might be able to negotiate for a better rate or a longer payment schedule. “Reach out to the lender and have a conversation about keeping the best terms,” says small business consultant Vivek Lakhiani. “Otherwise they’ll use whatever default terms they’ve assigned to everyone.”
In the case of Advanta, customers won’t be able to make any additional charges on their cards, but they can still take time to pay off their balance according to the terms in their business card agreement. And some Advanta customers — those that regularly paid off their balances each month — are being invited by American Express to open a new OPEN credit card with them.
Plan B
Find Some “Give” in Your Cash Flow
Know where every penny goes both in and out of your company, advises Jeff Van Winkle, vice chair for communications at the National Small Business Association, since it’s the best way to find and cut extraneous business costs. If you see areas where additional cash is needed, try renegotiating contracts with your suppliers. Ask to extend your payment periods by 5, 10, or even 15 days. “Just be aware that you might have to lay out a bit more in terms of payments or interest rates,” says Lakhiani. On the flip side, ask clients to pay upfront, or see if they’re amenable to paying you more quickly.
Get a Backup Credit Card
Goal: Replace the credit you’ve recently lost.
While many small business owners use personal cards to finance their business, almost every major bank offers a credit card targeted to small businesses, including American Express, CapitalOne, and MasterCard. As mentioned, Advanta’s best customers are now being courted by American Express OPEN, one of the Amex’s first offerings that allows clients to pay their balance over time.
Credit cards have always been the easiest way for small companies to access a new line of credit, even as they lose credit elsewhere. While the credit crunch has forced some card issuers to eliminate a few of their card offerings and tighten restrictions — for instance, you probably won’t get rates as low or a credit limit as high as last year — it shouldn’t take any longer than before to be approved for a card. All you need is a relatively high credit score.
In choosing among small business cards, decide what’s more important to your company: A card that offers rewards such as cash back or travel points, or one with lower rates — few have both. “It’s all about research,” says Gene Fairbrother, the lead small business consultant for the National Association for the Self-Employed.
Unfortunately, small business-specific cards are no longer marketed as heavily. Emily Peters, a personal finance expert at Credit.com, a consumer credit Web site, points out that card issuers have cut down on their promotional budgets, so you’ll often have to go directly to issuers’ Web sites and dig around before calling to apply.
Danger! Danger! Danger!
Replace a Closed Account Quickly to Protect Your Credit Score
If Advanta or another issuer closes your main credit account, even through no fault of your own, your personal credit score could drop by as much as 100 points. Reason: if the account was shut down before you paid off your balance, your utilization ratio, or the ratio of your current balance to your total credit limits, will be hurt. This is especially bad if you’re using a second card that holds a big balance, since all of a sudden it’ll look like you’re maxed out. However, as you open a new card and resume regular payments, your credit score should climb back to its true level.
Contact Your Local Bank
Goal: Get credit from the folks that can provide it quickly.
In the event of a credit meltdown, many small businesses tend to overlook their best bet for getting quick credit: the local bank that already hosts their checking and savings accounts. You might not be able to secure as large a line of credit as you could have last summer, but financial advisers estimate that customers in good standing can land anywhere from $5,000 to $10,000. “You already have a relationship set up; they know you,” says Fairbrother. “They’re going to do everything to keep you there.”
That includes increasing your credit line or working quickly to help you weather the rough patches. Within a couple days after Advanta cancelled the Coopers’ credit card, for example, their local KeyBank issued them debit cards to a checking account they had rarely used. The debit cards enabled their traveling employees to continue to pay expenses on the road while the Coopers researched new credit cards.
If you’re trying to get a completely new bank loan, your best bet may be community banks and local credit unions. They are more likely to know your business, and compared to big, corporate banks, they are more likely to provide access to senior managers, the bankers who have the power to approve loans. Another plus: many of these smaller lenders are verified Small Business Administration (SBA) lenders, so dealing with them will raise your chances of securing a government-backed loan if you decide to apply for one.
Apply for an SBA Arc Loan
Goal: Secure a loan of up to $35,000 to pay for any debt you’ve accumulated during the recession.
The just-about-to-launch America’s Recovery Capital (ARC) program from the SBA is likely a good longer-term option if you’re struggling to get credit. Part of February’s stimulus bill, the ARC loan will help companies make payments on existing loans such as credit card debt, but ARC is only open to firms that are at least two years old and have been profitable for at least one of the past two years.
You won’t have to make payments for the first year and will have an additional five years to pay back the loan. However, remember, you’ll be dealing with an SBA lender that will have its own rules on issuing loans and determining terms. You can use the money however you wish, as long as you’re making payments on applicable debts.
If you’re planning to apply, be sure to polish up your business plan. Not only will the bank need proof that you’re experiencing financial hardship — such as tangible evidence of decreasing sales and rising business costs — it expects to see cash-flow projections for the next few years ahead to make sure you’ll be able to pay back the loan.
Finally, act quickly: The loans are being issued on a first-come, first-serve basis, and the government is doling them out until September 2010 — or until the initial $255 million allocated by Congress runs out.
