A line of credit can be a lifesaver for an entrepreneur, providing a buffer against cash-flow problems and making it easier to handle recurring expenses such as payroll. But beginning in March, according to documents obtained by BusinessWeek SmallBiz, JPMorgan Chase suspended credit lines for a large number of business owners. According to someone familiar with the matter, the move affected thousands of businesses that had been clients of Washington Mutual before Chase bought the ailing bank in September 2008. The documents show that Chase tasked a special group inside the bank with responding to inquiries from borrowers whose lines of credit were being suspended.
The bank can expect plenty of those, at least partly because in many cases, the businesses whose lines were cut had not missed loan payments. Instead, their credit score or their financials had deteriorated, and credit-line agreements typically give banks the right to alter the terms of the line if there is a change in the borrower's financial situation. In this case, the changes are dramatic. If business owners can't convince Chase of their creditworthiness, they have three options: pay off the balance in full; agree to a conversion of the line of credit into a term loan; or go into default.