My Advice to Owner: Hold Your Ground on Bank Overture to Reduce Line of Credit

I understand that your bank is making noises about reducing your line of credit. They cited the lack of usage and their perception of “good cash flow”. Yes, I understand that the financial statements are somewhat deceiving, as they "look okay" but cash flow in reality is worse than it appears “on paper”.

My advice is to push back and avoid reducing the line of credit.

What’s the problem here? If you were using the line, they’d make money on interest. But the lack of usage limits your borrowing costs, thus reducing their revenue…….but they still have to have capital to support your POTENTIAL draw of the line…..that’s the rub. This is a “revenue” problem, essentially a pricing issue.

Why not agree to lower it now and we can always raise it later?

NO WAY!!

The reason: you’ll have to work twice as hard to get it back and it will take years to do so. Once the bank lowers the line, they are not going to be eager to raise it without new events, such as much higher profits, new collateral, more guarantors, etc. I can hear the bank say, “Sure, we can increase your line, tell us about the new collateral you’ll be providing……we already have all of the company’s assets.” So, avoid a line decrease.

Also, you may WANT the line of credit for funding AR related to sales growth when the economy turns upward, or to finance the cash portion of acquiring general intangibles from a printing company in an M&A scenario.

And, if who knows if you will NEED the line of credit to cover losses in the unpleasant event of a sudden decrease in business.

So what can we do?

The answer is going to involve money. Reducing the line, from the bank’s point of view, is really a solution to a pricing problem. Rather than lower the line, keep the line where it is but negotiate what is called an “unused line fee”. In other words, if the line is NOT used, the fee kicks in. It is essentially a pricing kicker. Not sure how much of a fee is needed here. Just want to introduce the concept.

I can give you more detailed guidance on this matter if I can review the actual loan documents, as “devil is in the details”.

John

PS: One more thing: although the bank mentioned your "good" cash flow, avoid correcting them......just let it go, change the topic....this has NOTHING to do with YOUR cash needs.....it has to do with the PRICING......Proof of the point: if you really needed the cash, you think they'd want to lend it just so you can pay bills? Yeah, right. So this is a no win area of discussion. Therefore, ignore it. Go elsewhere........It is fair game to say that you and your partners like to sleep at night knowing that the line is there, thank the bank for it, and try to leave it right there....but don't hesitate to bring up the unused line fee to "make it worth the bank's while" to keep the line at the same level.