Bank of America severing some small-business credit lines

[dixiegrrrrl]

By E. SCOTT RECKARD - Los Angeles Times
Published Mon, Jan 02, 2012 08:20 PM


LOS ANGELES -- Bank of America Corp., under pressure to raise capital and cut risks, is severing lines of credit to some small-business owners who have used them to stay afloat.

The Charlotte, N.C., bank is demanding that these 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.
http://www.newsobserver.com/2012/01/02/1749212/bank-of-america-severing-some.html

[dkf]

1. Is it normal for small businesses to have interest only loc's?

That can't be a good indication of viability.

[Yo_Mama]

3. They were relatively popular at one time.

Some lenders had much tighter criteria than the next. Usually such loans go over one business cycle with the option to renew at the lender's discretion or not renew (in which case the loan has a balloon payment) at the end of the business cycle. For a retail business, the business cycle is usually the year. For a manufacturing business, it might be product cycle of three months or six months.

The examples of the businesses getting cut off tend to suggest businesses that were much larger when the line was granted and subsequently shrank. Those types of businesses ought to be getting such lines cut down - which means payback.

The recession really started at the end of 2007. The recession officially ended in June of 2009. If you have carried people for four years and can't get them to start paying it down in the fifth year, the loan is bad and should be written down, IMO. Which is what may be happening.

This is probably due to the regulators - the FDIC really put the boot to a lot of community/regional banks on commercial loans, and now OCC is finally getting around to it. They won't make you call the loan generally, but they will make you increase your risk rating and thus your reserves, which means you lose money because you can't lend that money out to other people. One of the best ways to bust a bank is never to call bad loans.

[dkf]

4. Interesting. Thanks.

[rdking647]

2. thats why you should always know what the terms of your loan are

if its payable on the demand as these seem to be thats the risk you take...