For Dean Ragone, few things are more important than maintaining a high business credit score. Why? “That score determines how much credit our suppliers will give us,” explains Ragone. “Say I’m dealing with a lumber company and I need $10,000 worth of material. Having a good, clean record helps ensure that my business gets what it needs.”
Ragone is the founder of AllRisk, a 24/7 emergency-response company specializing in the repair of properties damaged by fire, flood, or other disasters. The firm, based in Somerdale, New Jersey, has 64 employees and $15 million in annual revenue.
Ragone says he really started to pay attention to his Dun & Bradstreet credit score (also known as a Paydex score) about seven years ago. He was having trouble getting the kind of credit he wanted from suppliers and realized that building his business credit would help him get a better response.
“The first thing I did was to instruct my accountant to submit our financials to D&B every quarter,” says Ragone. “About 80 percent of our vendors use the service and I want our financial information to be as accurate as possible.”
John W. Collins, a business credit expert and author of The Finance Formula, applauds Ragone’s proactive approach. “Business credit is not something you get on the spur of the moment,” he says. “The people who successfully get credit are the ones who realize it’s a step-by-step process.”
Ragone has also made a concerted effort to pay new vendors well before the net-30 deadline, just to get the relationship off on the right foot and show that he and his business are creditworthy. “Since I started paying on time and ahead of time, vendors have gone from extending us $5,000 worth of credit to $20,000,” Ragone says.
What’s more, when these vendors get their annual questionnaire from D&B asking them to rate his business, they’re more than likely to give positive feedback. “The last thing I want is any negative reports,” says Ragone. “Especially right now, because access to credit is so tight.”
Paying early has another important benefit: It can raise your business credit score. “Credit agencies keep track of how long it takes you to pay an invoice and will reward you for early payments,” explains Collins. “Good behavior like that is absolutely reflected in your credit score.”
If Ragone thinks he’s going to be late with a payment, he’ll reach out to the vendor directly and explain the situation. Recently, a large client was late paying Ragone, which meant he would be late paying one of his suppliers. “I picked up the phone and explained the situation to him,” says Ragone. “I told him I’d pay half this week and half the following week, which he was OK with. It’s all about transparency and open communication.”
Ragone also subscribes to a D&B service that immediately alerts him whenever there’s a change in his business credit rating. “I keep a close eye on our credit scores because I need to make sure our scores are correct,” he says.
For example, recently one of his lumber suppliers submitted a negative report about his company without telling him. The supplier claimed AllRisk hadn’t paid an outstanding invoice. As a result, AllRisk’s score took a hit. But it turned out that the supplier actually owed a credit to AllRisk and the supplier’s field rep had failed to convey that information to his accounts payable department.
Ragone was quickly alerted to the issue and was able to fix the problem the next day. His score has revived since then. “I look at the credit scores every two weeks, whether or not I get an alert,” he says. “It’s so important to maintain good scores. I don’t want to give my suppliers any excuses for cutting my credit in half.”
Vendors aren’t the only ones checking scores. Ragone always examines the business credit scores of his customers, which are typically property-management companies. “The first thing I do is go to D&B and see what their credit rating is, because I want to make sure I’ll get paid,” he says. “If I see some red flags, I may try to negotiate terms in my favor, such as getting paid 50 percent upfront.”
Also critically important to Ragone’s business is cash flow. While Ragone pays all his suppliers on a net-30 basis, his clients usually take two or three months to pay him.
With lag times like that, it’s essential for Ragone to manage his money wisely. “We know when we go through a really busy period, that’s when we’ll be spending the most,” he says. To make sure he has enough cash on hand, Ragone takes 15 percent from every check he gets and puts the money in a short-term investment vehicle like Treasury bills.
“We always look for opportunities where we can put some money away for two or three months,” he says. “We like Treasury bills. Even though they’re only offering 1 percent interest that’s still better than what the banks are paying.”
Ragone can also draw on a $1 million line of credit from his bank to cover the two-month gap between when he pays his suppliers and gets paid by clients. However, he tries not to use the line unless he’s very busy and spending money faster than usual. The most his business has ever borrowed against the line is $400,000.
Experts like Collins say there’s no reason why Ragone shouldn’t use that line of credit more often and more extensively, especially to take pressure off his cash flow. “You won’t get penalized for using more of your credit if you’re paying it down in a timely fashion,” Collins says. In fact, using the line more frequently would actually boost Ragone’s overall rating. Credit agencies give more weight to a $1 million line of credit, so using it regularly and paying it down could lead to a higher score and even more credit down the road.
“The business landscape has changed so dramatically over the last 18 months,” Ragone says. “I think a lot of businesses used to underestimate the importance of credit. Nobody can afford to do that anymore.”