Despite signs of an economic rebound, the financial crisis that landed in 2008 is still weighing on the commercial credit market. As a result, a lot of small business owners are still finding it difficult to get the financing they need to grow their companies — or simply keep them operating.
This is true not only of bank financing but also of financing from vendors, which is sometimes referred to as “trade credit.” Many vendors do allow their creditworthy customers to pay for goods and services 30, 45, or 60 days after delivery. Trade terms like these are, in effect, short-term, interest-free loans. To qualify, though, your business usually must be able to demonstrate that it is indeed creditworthy.
There are a lot of reasons why a small business might be deemed uncreditworthy. They run the gamut from slow sales to poor collections to late payments to bad personal credit. That’s right: In the small business realm, creditors look as closely at a business owner’s personal credit history and rating as they do the business’ credit.
Whatever the cause, poor business credit can have a devastating impact on a company’s financials. This is especially true of manufacturing companies, which often must pay for raw materials and other goods and services weeks (or even months) before they can collect payment from their customers. Without access to trade terms or short-term bank financing, such as a revolving line of credit, they can easily run out of cash and go out of business.
Another possible downside of poor credit is the inability to take advantage of what are known as “prompt-pay discounts.” Many vendors offer creditworthy customers a discount of up to 2 percent on the invoice amount if they pay early, usually within 15 days. Depending on your monthly volume of receivables, these discounts can add up to thousands of dollars a year in savings, but only if you have strong business credit.
The process used to determine the creditworthiness of your business is similar to the process used to determine your personal creditworthiness. It usually starts with a business credit report. Like personal credit reports, these are compiled by several different credit reporting agencies, including Experian, Equifax, and Dun & Bradstreet. The primary criterion these agencies apply is the regularity with which a business pays its bills on time.
The Paydex report from D&B is a widely used tool for determining business credit. Report scores range from zero to 100, with 80 being the minimum usually required to qualify for credit. A score of 80 indicates that a business pays its bills on time, while a score of 90 or 100 indicates that it usually pays bills early. Scores of 70 and below indicate late payments, anywhere from 15 days all the way to 120 days late and beyond.
If you don’t know how creditworthy your business is, you can find out by ordering the same credit reports your creditors would order. The cost of these reports varies: a Business Information Report from D&B that includes your Paydex score, for example, costs $119, while Experian offers three different reports of varying detail that range in price from $8 to $50.
When you receive your business credit report, be sure to look it over carefully, because it’s not uncommon for these reports to contain errors and outdated information. If you do detect errors, contact the reporting agency directly and arrange to have them corrected as quickly as possible.