We’ve written previously about the state of the small business loan market but only about 20 percent of the short-term credit for small businesses comes from this source. Suppliers make up most of the rest, according to the Credit ¬Research Foundation, a trade group in Columbia, Md.
Now with banks ¬choking off credit, many small companies are pressing vendors for more time to pay their bills, in effect asking for a loan to tide them over until they get paid by their clients.
In response to this increased risk trade creditors are taking a closer look at customers that ask for credit. They are using sophisticated risk analysis tools to ferret out and cut off customers who are least likely to pay their bills. It is estimated that over the past 18 months trade creditors have doubled their use of scoring tools such as credit reports from Dun & Bradstreet and Experian. PredictiveMetrics, a firm that advises trade creditors on risk, has seen client inquiries triple over the past three years.
It used to be that business owners who were late on small debts could work out a deal with suppliers, but the analytical tools leave less wiggle room. A plumber working on new commercial construction that may never be completed might now be categorized as a higher risk than a repair plumber who does small jobs in existing homes and is more likely to be paid by his clients.
Trade credit, like bank loans, are only one source of many for meeting the credit needs of a business. Like bank loans and other credit sources trade credit needs to be properly managed and maintained in order for it to fill the right piece of a company’s funding needs. Make sure you have developed a good funding plan for your business, analyzing the pro’s and con’s for each and ensuring you have backup sources of funding in other area’s in the event some level of your business funding is reduced or cut off.
