Welcome to 2012, small business owners who have lines of credit with Bank of America! You are about to see what a struggling banking giant will resort to when survival is at stake. This is from the Los Angeles Times:
The...bank is demanding that [small business] customers pay off their credit line balances all at once instead of making monthly payments. If they can't pay in full, they are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had.
Business owners complain that BofA's credit squeeze is abrupt and could strain their small companies and even put them out of business. The credit cutoff is coming at a time when the California economy can't seem to catch a break, and bucks what the financial industry says is a new trend of easing standards on business loans.
It's not entirely clear from the LAT story what the status of these credit lines is. Are the business owners still creditworthy? Have they missed payments? The numbers under discussion are large but not huge. One business owner owes $96,000, another owes $80,000. In the context of a small business, fairly typical. Credit lines are pretty much standard operating procedure for business that can't issue their own debt. They're are like credit cards with very high limits and relatively favorable interest rates.
For banks, they're a way to secure steady cash flow, with less risk than unsecured consumer loans.
It looks like BofA wants to rewrite the loans, upping the rates. What's probably happened is that, in more competitive times before the financial crisis, BofA offered these credit lines at low rates with the kind of options that homeowners are familiar with. One guy in the LAT story estimates that, with a new line of credit at 12 percent, his monthly payment of a $96,000 line would go up to $4,500 from around $450. That would put his current rate in the 4-5 percent ballpark — and he's been making interest-only payments. His new deal would raise that to 12 percent.
Small business owners who are subject to BofA's policy do have the option of shopping for loans that they can use to pay off their credit lines. But lending to small businesses has been tight and is just now starting to loosen.
So the upshot may be that affected businesses have no choice but to accept BofA's terms. If the businesses in question have been fighting to stay afloat, this could do them in. If they haven't, this will place a drag on their growth, as more of their profits will go toward servicing debt.
Now, I know this sounds like the big bad bank versus the plucky small businesses that are supposed to get the economy moving again. But the truth is that this tells a story about small business that a lot of people don't want to hear: that they're not the little engines of recovery that could. I posted on this topic last year:
[S]mall business has become too financially risky for banks to feel comfortable upping their lending levels. California's new tax policy — which has bipartisan support — should help, but it's not going to alleviate the larger problem of businesses that are carrying too much debt. This is why the financial crisis has been so damaging and has cost so many jobs: it takes a long, long time to bring those debt-to-equity ratios back to reasonable levels — levels at which banks would be eager to lend.
What's happened is that banks — like BofA — have provided so much financing to small businesses that the risk of running the business has become...financialized. It isn't about whether a company will be able to profit from its widgets or its services; it's about whether the company will be able to make its payments to its creditors.
At this point, the the price of risk, expressed as the interest rate on a loan or line of credit, becomes critical. BofA now believes that its line-of-credit risk is underpriced. It wants to shift the risk back to the small business, by rewriting the lines of credit so that the interest rates represent the right level of risk.
This is how financial capitalism works. Unfortunately, it doesn't support that happy-making idea that small businesses will somehow save us in the future. It reinforces the correct perception that big banks are calling the shots.