49% of small business owners expect a recession by the fourth quarter of 2025. And with a recession comes the inevitable squeeze on cash and access to capital by banks. So you may be wondering: what do I do, and how do I access cash if my business line of credit gets frozen? Things happen that are outside of our control, and one of the first things banks do when preparing for an economic downturn is pull in the reins. One of the first actions they’ll take is freezing your credit line. So what does it mean when your credit line is frozen?
Let’s say you have a $100,000 credit line and you’ve borrowed $60,000 against it. The first thing the bank will do is tell you that you can no longer access the remaining $40,000. Your line is frozen at $60,000. Then they may shift your payment structure from interest-only to requiring principal and interest. That means you’re now responsible for both the monthly interest and a principal reduction tightening your cash flow significantly. Is it any wonder that 82% of small businesses fail due to lack of capital and cash flow? The worst part? These things may be entirely outside of your control. You could be current on every payment, never missed a due date, and still get cut off because the bank is reacting to external economic conditions, not just your performance. They’re turning off the faucet to your access to capital.
This is the hidden danger of being dependent on banks. During a recession, 30% to 50% of loan applications are denied. So not only are you losing access to your existing line of credit the easiest money to access you now can’t even get another loan because your position now looks riskier to the bank. So what can you do? You need to prepare in advance so you, your business, and your family are no longer victims of these outside forces. More importantly, you can position yourself to take advantage of the opportunities that arise when others are cash-starved. If you don’t take these steps, you may not even see those opportunities. You’ll be so bogged down by the stress of cash flow problems that you won’t be able to lift your head above water. But when you’ve prepared, you’ll be in a strong capital position, able to act while others panic. That’s why it’s so important to view your finances through the lens of control. Let’s face it you started your business to take control of your destiny. But when you’re dependent on banks for capital, you’re not in control. As the old saying goes: A banker is someone who will sell you an umbrella when it’s sunny and take it back when it starts to rain.
Over decades of experience, through many economic cycles, we’ve seen this happen again and again: banks tightening credit, freezing access to lines, limiting your ability to move forward. It’s often not personal they’re protecting themselves. But that doesn’t make it any easier when you’re on the receiving end.
So how do you gain control? It starts with some simple shifts:
First, build a pool of capital that you have full liquidity, use, and control over. One way to start is by redirecting extra payments that you were making to banks whether to pay off loans or debt into your own pool of capital.
Second, reconsider how you save. Most people keep their savings in qualified retirement plans like 401(k)s. That means limited access. You can only take out the lesser of $50,000 or 50% of the balance as a loan. You’re also required to pay it back within five years, which can limit cash flow even more. Instead, start saving in a place where you have complete access and control. It doesn’t mean you have to pull money out of your 401(k), but direct future contributions toward vehicles that offer you control and liquidity.
Third, stop paying cash for major purchases. Squirrel that money away. Keep it accessible. If you have money on the side, you can still choose to pay for something, or take a loan and pay it back on your terms. You increase your flexibility and control, and you’re no longer asking for permission from the bank or risking being denied when times are tough.
If you’d like to learn more about how to prepare your business for when the bank freezes your credit line, visit our website at www.tier1capital.com and click the “Schedule Your Free Strategy Session” today.
Thanks for reading, and remember it’s not how much money you make, it’s how much money you keep that really matters.