In the current pandemic and economic recession, many small business owners are understandably concerned about making ends meet. One potential solution to freeing up some cash is to negotiate with their business creditors, whether it's to increase their current credit limit, negotiate credit payment terms or open a new line of credit.
Having this conversation can be a daunting prospect, especially if your business was closed and/or lost revenue during COVID-19. However, with the right strategies and research, you can position yourself for the best chance of success. Follow these tips to help you prepare for a negotiation with your creditor.
Tips for increasing your current credit limits
When a financial institution considers increasing a customer's credit limit, they typically look at your overall track record of debt repayment over several years. What's unique today is that 2019 is ancient history when it comes to debt repayment analysis, said Bryan Toft, chief sales officer at Sunrise Banks.
"When assessing an increase to credit limits, lenders will want to know how your business is doing in 2020 [and] will likely want to see your year-to-date … financial statements," said Toft.
[Read: A Practical Guide to Funding Your Small Business]
The most important thing you can do is prepare a narrative to justify the credit increase. Toft recommends the following approaches:
- Create a projection through the end of 2020 and all of 2021. If the pandemic has affected your business and you haven't shown positive cash flow in recent months, put together a projection through the end of 2020 and all of 2021 that shows how your business will improve as time goes on.
- Illustrate the exact impact of COVID-19. In your month-by-month statements, you can point out how well your business was in January and February, and how the pandemic has affected your business financially since then.
- Explain what you've done to adapt your business approach. Your lender will want to know what you have done differently in response to the pandemic in an effort to make up the loss in revenue. This will show you are thinking strategically about your business.
Financial experts often advise business owners to take out lines of credit before they need it to ensure it's there and ready for them in the event of a cash crunch.
Tips for seeking a new line of credit
Financial experts often advise business owners to take out lines of credit before they need it to ensure it's there and ready for them in the event of a cash crunch. If you don't already have a line of credit, you may face an uphill battle in opening a new one right now — lenders need to be extremely careful with the increased risk factors and limited resources they're currently facing in the current economy.
Toft's tips for applying for a new line of credit include:
- Work on improving your personal credit score now. Many credit cards and lines of credit factor in business owner credit scores when determining limits and interest rates. If your personal credit score could use some improvement, seek out a credit-builder tool.
- Have a clear purpose for your line of credit. A lender will want to know exactly how you plan to use the credit they extend to you. If it’s needed for gaps in business cash flow, for example, show your estimates that explain why you need it and the reason for the amount you chose.
[Read: What Is a Business Line of Credit?]
Tips for negotiating payment terms on existing credit products
If your business has been unable to make loan or credit card payments, you're not alone: Census Bureau data found that more than 20% of small business ownersmissed scheduled payments like rent, utilities and payroll in the first two months of the pandemic, and many more are struggling to keep up with expenses due to their decrease in revenue.
While it's not an ideal situation, many lenders understand the widespread financial hardship business owners are experiencing and are willing to negotiate. It's always best to reach out to the lender before a payment has been missed, said Toft, but if you've already fallen behind, reach out to the lender to ask if there is any way to modify the payment terms.
- Propose a realistic payment plan. Based on current revenue and projections, show your creditor what payment amount you could make (even if it's interest only) and estimate when you could get back to paying the regular payment amount.
- Get help from local business organizations. There are many local and national resources to help small businesses recover from financial difficulties, including Chambers of Commerce, SCORE, SBDCs, City or State Economic Development Centers and nonprofit organizations. Toft advised seeking out those programs to help you with a plan or even refinancing your debt.
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