What Happens If the Bank Does Not Renew My Business Line of Credit?

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Business lines of credit are typically renewable, which means the business has to requalify for the loan usually on an annual or bi-annual basis. Your bank can refuse to renew the line, in which case you no longer have access to the unused portion of the line. Furthermore, when your bank cancels your line of credit, you must repay the entire balance that you owe, usually within 30 days of the cancellation. Generally, banks cancel a line of credit if a business experiences a drop in revenue and therefore no longer has sufficient income to qualify for the loan.

Calling In Loans

During the Great Depression banks were able to “call in” all types of loans, which means the banks could require borrowers who had never fallen behind on loan payments to immediately repay personal and business loans. This exacerbated the economic problems in the nation, and as a result, Congress passed legislation that prevented banks from being able to call in personal loans unless borrowers had defaulted on their loan payments. However, no such measures were taken to protect business borrowers, and consequently banks can still call in business loans for a variety of reasons.

Repay The Loan

When a bank cancels a line of credit you normally have to pay off the entire loan on your next payment due date. You can use cash from your business accounts to settle the debt or attempt to refinance the debt with a new bank, in which case you use the new line to pay off the existing debt. However, while each bank has its own underwriting guidelines, the guidelines at different banks tend to follow the same principles, which means that if your bank cancels your business' line of credit, you may have trouble obtaining a new loan elsewhere.

Guarantors

Generally, anyone with a 20 percent ownership stake in a business has to sign as a guarantor on any loans or lines of credit that the business establishes. If the business cannot afford to repay the debt, the guarantors have a legal responsibility to repay the debt on behalf of the business. You can use your own personal cash assets to settle the debt or you can take out a loan on your home or other personal property and use those proceeds to repay the debt. If you fail to settle the debt, it will appear on your credit report for up to seven years and could prevent you from obtaining future credit for yourself or your business.

Other Considerations

When a business loses access to a line of credit, it can ultimately cause the business to go bankrupt because many small companies rely on credit to buy equipment and use sales revenue to repay the debt. Without access to credit, a business cannot buy the equipment and materials it needs to carry out its day-to-day operations and therefore it cannot generate revenue and remain solvent. Some lenders offer lines of credit and business loans to companies that cannot qualify to borrow from mainstream banks. However, such lenders usually charge high interest rates and hefty fees that may prove too costly for the business.

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