Most businesses have a line of credit sufficient to cover short-term cash flow gaps. The amount and annual renewal typically aren’t major concerns—until something goes wrong. If cash suddenly runs short and the company needs more credit fast, it’s often too late to increase the limit or secure another option.
Banks generally discourage small and mid-sized clients from working with multiple banks. They want to keep their relationship strong and their collateral position clean. Even if another bank is willing to help, it probably would be in a secondary collateral position, making approval unlikely. That leaves businesses effectively locked into a single banking relationship, unless they can find an alternative that doesn’t threaten their primary bank’s position.
Particularly in difficult economic times, the SBA (and other entities) create programs for small, medium, and even larger companies, often accepting a secondary collateral position. Some of these SBA programs are always available, but they become especially relevant during economic downturns.
Some years ago, the economy was getting ugly. I was becoming concerned about the adequacy of our bank line of credit when I learned of a new SBA program. Some credit unions now offer a wide range of financial services, but traditionally banks saw them as non-competitors. So, we looked for credit unions among the list of local approved lenders and found one where we had a contact. Once we had everything lined up with the credit union, I emailed our banker advising that we intended to use the SBA program unless he objected. “Well, it’s only a credit union…”
That only a credit union funding helped save us when the economy tanked. We were fortunate. Try to arrange more credit long before it’s needed.
