Bank of America canceled unsecured lines of credit for some of its commercial contractor clients, according to Julie Westermann, media spokesperson for the Charlotte, N.C.-based bank.
"In light of falling economic conditions, we made a strategic decision to both reduce and limit our credit exposure to commercial contractors," she said. "Our experience tells us that, during periods of economic slowing, our portfolio of commercial contractor loans is very vulnerable to deterioration."
The bank gave its contractor clients the option of paying off their lines of credit or converting their balances to 48-month term loans.
The decision will be especially harmful to specialty contractors, said Scott Brown, interim public affairs director for Associated Builders and Contractors.
"It's true the construction industry has had a challenging couple of quarters, but the industry continues to be strong," he said. "The construction industry is on the heels of an unprecedented 10-year expansion. We believe this is a short-sighted and reactionary decision, which will most likely starve those contractors who had vital lines of credit with Bank of America."
The move to limit credit exposure from this segment of the industry actually began early 2001 when Bank of America sent letters to the affected contractor clients notifying them of the new policy.
Lines of credit play a major role in providing working capital to businesses of all sizes. However, a Federal Reserve study found that 60 percent of firms employing between 20 to 49 workers used the lines of credit to handle their short-term cash-flow problems, reported The Orange County (Calif.) Register.
"We continue to look for strong contractor credit; we are just applying higher lending standards for commercial contractors," she explained. "If economic conditions improve and contractors' businesses pick up, their credit fundamentals will also improve and give them better access to credit."
If other banks around the nation take Bank of America's lead, it will have a major impact on the industry, especially in light of the terrorist attacks on the World Trade Center and the Pentagon, Brown noted.
"The events of Sept. 11 brought an added degree of uncertainty where there was already uncertainty," he said. "The construction industry is the core of the economy. Denying commercial contractors a crucial means of obtaining capital will slow the efforts of the industry to move forward."