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Credit.jpgMaintaining good business credit is essential, as a bad credit rating may severely hinder your business growth and expansion. Without good business credit, banks can be less likely to accept your loan applications. Operating without loans can have significant impacts on your cash flow and working capital and does nothing extra to build your business credit.


In addition, if you skirt your financial responsibilities, it’s unlikely that suppliers will extend your business a trade or credit account. That means that you may lose the ability to leverage the 30-, 60-, and 90-day terms of invoices as short-term loans. In addition, many businesses enjoy discounts provided by suppliers to encourage prompt payment; cash customers usually do not get such discounts.


If your business does not have good credit, you can take steps to repair it. The first step to building your business credit is to contact your creditors to set up payment schedules. Such schedules should be reasonable and fair to both your business and the creditor. If you have some history of paying bills promptly, you may find that creditors are willing to set up alternative payment schedules. In addition, successful completion of a payment schedule often leads to a continuing relationship between businesses and creditors.


Late payments or unpaid invoices can often be traced back to housekeeping or paperwork issues rather than cash flow problems. Even these types of mistakes can affect your business credit.

To determine the root cause of the problems ask yourself:

  • Are your creditors sending invoices to the correct address and person?
  • Are your payment checks being sent to and received by the correct department and person?
  • Are all parties clear on when payments must be made?


Additionally, listed below are steps you can take to improve your business’s creditworthiness:

  • Always pay on time. The ability to repay loans promptly has a great impact on business credit scores. You should endeavor to always pay within the terms you have with your suppliers. On-time payments are the most direct way to improve a business credit rating.
  • Pay your biggest bills first. Some business credit scores are dollar weighted, such as the PAYDEX ® Score. Therefore, if you are consistently paying all of your smaller bills but neglecting your largest, your Paydex score can suffer.
  • If timely payments to suppliers and lenders are not included in your business credit profile, your business may not get the credit it deserves for paying your bills on time. You should monitor your business credit profile at least twice per year to ensure that vendor payment relationships are included.
  • Stay on top of your business credit profile. You must ensure that your business credit profile information is complete and accurate. Address any inaccuracies immediately. Certain business credit companies offer customer services and online tools that can help you update and manage such details.
  • Contribute to your company’s credit profile. You can communicate to the credit bureaus as well. The more information you give to credit bureaus like D&B, the more robust your business credit profile will be. In addition, try to choose suppliers and vendors that report their experiences to credit bureaus, which can also boost your profile.

Many businesses are feeling the pressure of tightened credit requirements. However, by carefully planning and executing your plan, you can help fix and improve your business credit.


The information and opinions provided by Dun & Bradstreet Credibility Corp. is provided "as-is" and are solely those of Dun & Bradstreet Credibility Corp. Dun & Bradstreet Credibility Corp. makes no representations or warranties, express or implied, with respect to such information and the results of the use of such information. Neither Dun & Bradstreet Credibility Corp. nor any of its parents, subsidiaries or affiliates shall be held liable for any damages, whether direct, indirect, incidental, special or consequential arising from or in connection with a business's use or reliance on the information or advice offered by Dun & Bradstreet Credibility Corp. You should consult a qualified professional to assist you in determining the most effective business structure for your particular business.

QAcharlesgreen_Body.jpgby Susan Caminiti.

For many small business owners, debt is a four-letter word and something to be avoided. But is that always the smartest way to view it? No, says Charles Green, executive director of the Small Business Finance Institute, an Atlanta-based non-profit that provides financial education to entrepreneurs. Business writer Susan Caminiti recently spoke with Green about the smartest ways SBOs can use debt, how it can help to facilitate growth, and when it’s not a good idea.


SC: Let’s start with the big picture: Is it getting easier for small business owners to get debt financing?

CG: I would cautiously say yes, not because of the environment, but because of all the choices that are out there. I’m actually writing a book that will look at different financing sources for small businesses, including the private equity money that is now available through different technology platforms. In the past, private equity rarely connected to a small business unless that business had the potential to scale up and go public. Now you can get a $5,000 working capital loan through a technology site such as IOU Central.


SC: Why then do you believe that so many small business owners have such a negative view of debt?

CG: It’s a value judgment and I don’t criticize it. A lot of people want to build a business from the floor up and they don’t like the idea of being indebted and therefore obligated to a third party for anything. And so they are very cautious about using any kind of leverage to extend their business opportunities or to step out and grow. My father was the same way. He was a child of the Depression and very cautious about money. He used to lose sleep over a $92-a-month house payment.


SC: What are some of the reasons why a small business owner should consider taking on debt?

CG: If there is an opportunity to expand the business, financing basically allows you to move forward in a more timely or bigger manner without having to wait for accumulated profits. If you have customers lining up to buy your goods or services and you need financing to provide the labor or the raw materials, then that’s a good reason for taking on debt. The challenging part is measuring what that growth really is and not letting it overwhelm you.


SC: In what regard?

CG: Growth can put a company out of business as fast as insufficient sales can. If you have a manufacturing company, for example, that has to order raw materials, you typically have to pay for those materials shortly after they arrive at the plant. Then there are labor costs in the form of workers who have to be paid every week to convert those raw materials into product. Now once those products are complete, you may not get paid until 30 days to 60 days after those goods are delivered to the customer. That gap—the time between what you have to pay your vendors and when you actually get paid—has to be managed correctly or a business will run into trouble.


SC: Is that where debt financing can help?

CG: Yes. If a business can cover say, 25 percent of costs from the cash they have in the company and they can obtain a line of credit that can handle the other 75 percent, that’s a pretty good ratio. Then once the payment is received from the customer, the business pays down the line of credit.


QAcharlesgreen_PQ.jpgSC: If a business has a line of credit but needs to increase it because of new orders, what is that conversation like?

CG: A small business owner would want to have that conversation with their banker. But the banker is also going to want to see that the owner is going to hold some of those profits in the business and reinvest them rather than just rely on the bank to put up the additional money.


That simply means that the owners are not taking money out of the business when they see that there’s been a significant increase in sales. Too often you’ll see an owner run out and buy a new car or lake home with that extra money rather than let the cash accumulate in the business.


SC: When is it not a good idea for a business to use debt?

CG: If a company owns a piece of real estate or some other asset and the owner starts borrowing against that for general purposes, that’s not a good idea. If the owner loans the money to himself, it serves no economic purpose for the business.


SC: If a business is in good financial shape, should it consider a line of credit just in case?

CG: I would say so. It’s a contingency against any number of factors that might come up that have nothing to do internally with the business. It could be that a weather event shuts your company down or the business is a victim of financial fraud. Think of it the way you think of an insurance policy. When you’re in that position you don’t want to go hat in hand to get capital to survive. You want the resources to get up and move on and have the financing issue behind you. The best time to ask for money is when you don’t need it.


SBC newsletter logo.gifSC: Should you have a specific number in mind when you meet your banker to inquire about a line of credit?

CG: I think the more important thing is for you to understand what your business can handle in terms of paying it back. If I have a net profit of $100,000 a year, I don’t think I can get a line of credit for $100,000. It will probably be something smaller than that. But then again, I shouldn’t need much more than that. Start the conversation with your banker and simply ask how they would approach a loan for a business like yours.


This interview has been edited and condensed for clarity.


Disclaimer: The opinions expressed are solely those of the author and interviewee. Since the details of your situation are unique, you should always seek the services of a financial planner, CPA, or other qualified professional.

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