Debra Parcheta, founder of Blue Marble Enterprises, recalls one of her most frightening moments as a business owner. It was about two years ago, when the recession officially hit. All at once, customers stopped paying their bills on time.
“Many were Fortune 500 companies that were implementing new accounting policies,” explains Parcheta. “They were now going to pay in 60 days, not 30 days, and they really didn’t care how the change would impact us.”
Suddenly, Parcheta found herself with $55,000 in outstanding invoices. There wasn’t enough money in her account to make that week’s payroll of $22,000.
Fortunately she had an ace in the hole: great business credit.
From the time she founded Blue Marble, a designer and implementer of customized databases with $1 million in annual revenue and 22 employees, Parcheta made a point of managing her finances responsibly. She always paid her bills promptly and built solid business credit, because she knew the day would come when her credit would get her out of a jam.
“To me, business credit means being prepared,” she says. “There’s always going to be a time when you’ll have to spend more cash than you have on hand, either because something has gone horribly wrong or because there’s a great opportunity for you to jump on.”
Whatever the case, without access to a bank loan or a line of credit, it’s almost impossible to come up with money when you need it.
A few years before her payroll crisis, Parcheta had leveraged her credit to land a six-figure line of credit. A line of credit works like a credit card. The bank approves a business owner for a maximum amount — in Blue Marble’s case, $125,000 — and the owner can spend as much or as little as they choose over an agreed period of time.
When Parcheta applied for her credit line, she was in a position of strength. She had a high business credit score and good cash flow, which greatly improved her chances of getting approved. And when trouble came, she tapped that credit line and paid her employees as usual. When customer payments started rolling in a few weeks later, she quickly paid off the balance.
“Company owners need to stay on top of their business credit, because when you get smacked in the face, that’s when you really need it,” she says. “I check our credit rating with Dun & Bradstreet and always make sure we’re in the top level. That’s very important to me.”
Wayne Sanford, founder of NewStart Financial, a credit consulting company, and author of the forthcoming book The Real World of Credit, says registering a business with D&B is a critical first step to building business credit. He also approves of Parcheta’s habit of checking her Paydex score — a score D&B provides to show how quickly a business pays its bills — on a regular basis.
“Unlike with personal credit, you can check your business credit report as many times as you like and it won’t affect your score,” he says. “Additionally, if you notice any inaccuracies on your report, you can fix them before they negatively impact your business.”
Sanford also recommends that business owners head straight to their local Staples, Office Depot, or OfficeMax and open a store account, because these retailers report monthly account activity to D&B. Business owners who charge supplies each month and pay off the balance promptly are rewarded with a rising Paydex score.
Another way Parcheta has built business credit is by issuing company credit cards to her employees. Her employees, many of whom work remotely, are free to use the cards for office supplies and business travel, though steak and lobster dinners for friends are off-limits. The cards allow Parcheta to monitor what everyone is doing and how they’re spending money.
The credit card statements go directly to the company bookkeeper and are paid in full at the end of each month. “We always pay our credit card bills on time and in full because that’s how you prove you’re good with money,” Parcheta says. “This approach is just golden when it comes to your overall business credit rating.”
Sanford also advises business owners to make prompt payments on their business credit cards. But he notes that credit card companies typically don’t report to the business credit bureaus, which means that even if you’re making prompt payments it won’t be reflected in your Paydex score. However, if you start paying late or become delinquent, card companies will report the problems, which could severely damage your credit score.
Another of Parcheta’s tenets of good business credit: Never mix business with personal credit. Recently, she was poised to buy a new building for her business but at the last minute the bank asked for a lien on her house before it would approve the loan. Parcheta turned down the loan.
She would have been sharing the building with other tenants, she explains, and if there was a problem she could’ve been held personally liable. “Once you mix business with personal assets, you pierce the corporate veil,” she says. “If there were ever a problem, one of these tenants could potentially have gone after my house, my savings, or my children’s college fund.”
Sanford believes that banks are trying to get their hooks deeper into business owners, including their personal assets, and that business owners should resist whenever possible. “I would strongly advise against mixing personal and business assets,” he says. “It’s very risky to leave your personal assets exposed. Should something go wrong, everything you’ve worked for can be taken away in a heartbeat.”
Finally, Parcheta keeps a close eye on profitability because she knows it’s critical to securing a business loan or renewing a credit line. At least once a quarter, she digs into the books to determine how and where Blue Marble could be making more profit.
“When you apply for a loan, bankers will always check your profitability,” she says. “They want to see that you’ve been able to manage your business in a responsible fashion and are thus deserving of credit.”