“After careful consideration Sun National Bank has decided not to renew the above referenced $600,000 line of credit.”
That one sentence, from a bank letter (right) forwarded by a GSP importer, immediately raises concerns about the future viability of the business.
The reason for the bank’s decision? The company could not pay the balance down to zero for 30 consecutive days and otherwise meet the terms of the loan agreement.
Why couldn’t the company meet the terms? It had paid nearly $250,000 in additional taxes because of GSP expiration – a huge sum for a family-owned business with 22 employees.
Lines of credit are crucial for importers, especially small businesses. Companies use them to bridge the gap between paying foreign suppliers upon delivery of goods and collecting payment for the subsequent US sales. Reduced or eliminated credit can lead to a vicious cycle that looks something like this:
At the end of each cycle, your business looks worse to the bank, which leads to the next round of credit reductions. And the company from that letter certainly isn’t alone*:
- In January, we wrote about a family-owned company for which GSP expiration was a “major factor in the loss of margin in our products, which led to the bank calling our loan.” The couple was forced to sell the business it spent years building.
- In that same article, we wrote about another company who emailed: “I’m in over my ears in debt, bank recalled our credit line due to a loss in our financials, don’t know how much longer I can survive.” The company expected to run out of money around this time of the year.
- In March, we wrote about another family-owned company who said: “The trickle down effect is this- you don’t meet your sales numbers, you don’t have the [Accounts/Receivable], you don’t get to borrow the same amount of money, you slowly lose your credit line, then your bank wants to get rid of you because you’re now “non-performing” and now your company has to cut back even further. Lay off more people, cut back more expenses or delay capital expenditures, etc. Small business owners might stop taking salaries and those cuts start trickling down into household budgets.” That company has stopped importing (previously) GSP-eligible products and, after 34 years, is contemplating getting out of the importing business completely.
As the examples show, once credit starts to dry up, companies have few options – or at least few good ones.
*If you’re a GSP importer that has experienced something similar and are willing to be profiled, please let us know.