End of a Credit Line: Faced With a Sudden Loss of Access to Quick Cash, Business Owners Scramble for New Sources of Credit

Aug. 2--The news came by e-mail to Eugene art glass entrepreneurs Mary Hornig and Christopher Mini.

Advanta Corp. was shutting down its credit card business, canceling the business credit cards the two were using for cash flow in their various successful business ventures.

"What's happening with this?" Hornig wondered. "It's just so odd for a credit card company to go out of business with one week's notice. It was just business as usual -- and one day it stopped."

Pennsylvania-based Advanta closed its accounts to new charges on May 30 in a last-ditch attempt to preserve cash to cover increasing losses on loans to small businesses.

The result was that 1 million small businesses lost access to a popular cash flow mechanism. Merchants and other businesses had to scramble to switch to alternate cards or find new lines of credit.

That kind of sudden loss of credit -- from credit cards or bank lines of credit -- has become a major worry for small businesses in Oregon and across the nation, said Jenna Kaluza, state director for the National Federation of Independent Business. "Credit lines that businesses have always had are being cut down. They're having a hard time qualifying for loans even though they've always qualified for them in the past."

Now another company, 101-year-old CIT Group Inc., is on the verge of a bankruptcy that would leave another million small-business owners in the lurch.

While CIT loaned money to small businesses, it also traded heavily in the complicated credit markets. When those markets locked up in late 2007, the company required a $2.3 billion federal bailout. As the recession deepened, the company failed to regain its footing.

For both vulnerable start-ups and established businesses weakened by the recession, an abrupt loss of quick access to cash could spell the end of the line.

"It worries me. We're all at the mercy of the financial services industry. I don't know any business that's so big they're not at the mercy of the bankers and the people who loan the money," Mini said.

The stakes in Oregon are particularly high. Small businesses make up 98 percent of the state's employers, according to the Small Business Administration. They employ 57 percent of the state's private-sector work force.

Setting the stage

Small businesses are vulnerable to upheaval in the credit card industry because they have become heavily reliant on plastic for cash flow.

A May survey sponsored by the National Small Business Association found a majority of respondents -- 59 percent -- used business credit cards for cash to carry them through while waiting for customers to pay. That's up from 16 percent in the early 1990s.

Advanta led the way. Beginning in 2001, the company concentrated on small businesses and aggressively sought to expand its credit card trade.

In 2005, the company brought out its "Very Best Credit Card Available" line for small businesses that offered zero percent interest for 15 months, 5 percent cash back, no-fee employee cards and zero liability.

In 2006, Kiplinger's Personal Finance Magazine named the Advanta Platinum card the "best card for business expenses."

"They were going after mom and pop operations," Mini said.

Other big banks also competed for small business, including American Express, Bank of America, US Bank. Wells Fargo and Citibank.

Small business owners walked into banks intending to establish a business line of credit and came out instead with credit cards, said Molly Brogan, spokeswoman for the 150,000 small businesses that belong to the National Small Business Association.

Small businesses used the cards to buy inventory, cover payroll and pay mailing expenses. They could manage their credit lines on the banks' Internet sites, which made for easier accounting. "Their use is expanding because there's so much business-to-business electronic interaction now," said Robin Burk, US Bank regional president in Eugene.

Then, in the wake of the 2008 meltdown, many banks sought to limit their exposure to all kinds of borrower debt, including credit cards.

One third of respondents to the National Small Business Association survey in May said their credit card lines were reduced in the previous six months. Advanta found that it was losing money by providing such low-cost credit cards to small businesses and began slashing customers' credit lines before ending them entirely.

Mini got a letter saying Advanta was suddenly cutting his $9,000 credit limit to $2,292.

"That actually harmed me because I had $1,500 or $1,600 on the card at the time and -- all of a sudden -- I'm over the 50 percent (balance) limit that says you're a deadbeat."

Uneasy banks

Eugene accountant and certified financial adviser Janice Anderson counsels her small- business clients to use traditional bank credit lines -- as opposed to credit cards -- because the associated costs are generally lower, she said. But, lately, that's not as easy to do.

"Lenders are requiring more in the way of guarantees and more in the way of collateral. Sometimes it's been hard for (borrowers) to access (credit) very easily. You hear horror stories, especially if they're buying property. They've got 50 percent of the capital available to contribute, and they still can't get the loan," she said.

A lack of credit is a top concern of Oregon small businesses -- alongside taxes and health insurance costs, said Kaluza, whose federation represents 7,000 of them.

"Some of the credit-worthy businesses want to borrow and can't. No one can really qualify," she said.

Even existing credit lines can have problems, said Shawn Winkler-Rios, executive director of eDev, a Eugene nonprofit that launches small businesses. "A couple of months ago, when everything hit, we started hearing stories about credit lines being closed. People are kind of getting nervous.

"Banks are becoming much more conservative in terms of business lending. The bankers we work with -- or talk to -- are quietly saying things are getting tight."

Increasingly, middle-class entrepreneurs are seeking startup funds from Winkler-Rios' micro lending operation, which was set up to lift low-income Lane County residents into business, he said.

Additionally, recession-scarred business owners are spooked by a little-known provision of the federal Uniform Commercial Code -- a rule book for business procedures -- that allows banks to seize deposits to reimburse the bank for a line of credit that's unpaid or in default.

This "right of offset" provision came to light in Eugene a year ago after Pacific Continental Bank seized $545,000 out of the accounts of a struggling construction company, Roberts Professional Construction Services, causing dozens of checks to bounce and nudging the company into bankruptcy, according to statements in subsequent bankruptcy proceedings.

Such actions on the part of banks are rare but "it's not unheard of," said Richard Renken, banks and trusts program manager for the state Division of Finance and Corporate Securities.

When a depositor isn't paying its bank and the depositor has money in its checking accounts, what's the bank going to do? Renken asked. "You're in the business of loaning money and you're in the business of asking people to repay."

Pacific Continental Bank declined to comment. "We have an across-the-board policy that we do not comment on our loan policies or procedures," spokeswoman Maecey Castle said.

But in a March guest column in The Register-Guard, Pacific Continental CEO Hal Brown said lending money to small business is a priority for Pacific Continental Bank and the practice is important for economic recovery.

A bank wouldn't exercise the right of offset out of the blue, said Robin Burk at US Bank. Burk said US Bank considers small-business borrowers a key customer group.

"If you have a line of credit and it's being used appropriately and paid on time -- unless there's some serious deterioration that we become aware of in the business -- our lines of credit are there and available for ... use. We really want more customers and good customers to borrow money. That's how a bank makes money."

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