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6 ways your business credit can plummet

Rachel Hartman

July 17, 2014

Having good business credit seems simple enough on the surface: On-time payments build business credit, while missed payments cause it to slump.

But there's more to it than that. And if you're not vigilant, a few missteps could damage your company's rating. This, in turn, can make it difficult to get loans and favorable terms from suppliers.

We had experts weigh in with six factors that can affect business credit. Read on to learn the negative impact they can have, as well as ways to avoid — or recover from — these situations.

1. Inconsistent reporting

Even if you pay on time, a supplier might report those payments to the credit bureaus as late. “It's a mistake we see all the time,” notes Levi King, founder and CEO of Creditera, a provider of personal credit, business credit, and identity theft solutions to small businesses.

Perhaps when you first paid the provider, you were offered the terms of cash on delivery or net 30 for payments. Then, after a year, the provider might have changed the terms to net 60. However, the company might be reporting them as late because it hasn't changed the original terms of the payment setup in its filing system.

Sometimes, payments might not be reported at all. If a supplier you deal with isn't listed on your business credit report, it's most likely because the company doesn't report your payment history. In fact, of the more than 500,000 suppliers extending credit, only about 10,000 report, according to Experian.

If, when looking at your business credit report, you realize a provider is incorrectly reporting your payments — or not reporting them at all — contact that company. Ask about the possibility of having your on-time payments reported to the credit bureaus.

2. Being overly optimistic

Sometimes it's easy to overlook the danger of slumping sales. “Many small-business owners think they will pick up next quarter,” says Jim Herst, a professional debt manager based in Highland Park, Illinois. If the business is short on funds, it might be easy to max out a credit card, take out another loan, or borrow from family to meet payroll for a period you expect to last a month or two. Pretty soon, however, if sales don't increase, you might find yourself unable to fulfill payment promises, notes Herst.

If you haven't already gotten in touch with creditors, now is the time to do so, suggests Herst. Ask for approval to make reduced payments, or long-term payments, or both.

When you get in touch with creditors, “talk about realistic payments that you can really make,” suggests Michelle Dunn, credit and debt collection expert, and author of “Customer Training: How to ensure you get paid on time & what to do if you don't.” If you show an effort to work out a solution that you can follow through on, creditors are more likely to be receptive to a new payment agreement.

Also, there are organizations that can help a business facing financial pressures, notes Herst. Having a professional contact creditors in your place can free up your time to focus on running the business.

3. Not staying on top of receivables

If you focus on the sales your company makes, and overlook the actual cash coming in, the funds you have on hand can take a hit. When you make a sale, you're not really making a sale until someone pays you, explains Dunn.

Perhaps you have terms set up with your customers of net 30 or net 45, but let them pay at net 60. “When you aren't taking control of your cash flow and having customers pay on time, then you can't pay,” notes Dunn.  Without funds coming in from customers, you'll run the risk of not having enough cash to send payments to creditors and suppliers. This, in turn, could lead to problems of missed or late payments on your part. And if creditors and suppliers don't receive money from you within the time frame you agreed on, they could report your missed or late payments to credit bureaus. Those notifications could cause your business credit rating to drop.

To boost the cash coming in, consider changing your terms. And when you do so, offer an incentive. For instance, perhaps you tell customers you'd like to change regular terms from net 60 to net 30. In addition, offer your larger customers a discount if they pay in 10 or 15 days. “It's a win-win,” explains Dunn. Your clients will have the chance to save money, and you'll start seeing larger bills getting paid right away.

4. Outstanding payments

While you may be aware of regular payments that need to be made, occasionally a bill that falls outside of your routine business activities could get overlooked.

When that happens, if the item is on a public record, it could reflect poorly on your company's credit.

“Small businesses might have a $300 outstanding collection or tax lien,” notes King. “They can pay it — that's not the problem — but they might not know it's there.”

To learn of any outstanding payments you might have, check your business credit report. If you find you owe a certain amount, pay it off as soon as you can.

5. UCC filings

If a lender such as a bank or credit union provides your company with credit, and you pledge assets as collateral against the loan, that lender often files a statement known as a Uniform Commercial Code (UCC) filing. This is a public document that lets other lenders and creditors know which of your business assets are securing the loan.

For instance, perhaps you take out a loan for your small business. A UCC filing may note that you pledge inventory or other assets as collateral against the loan. It is listed on your business credit report.

When your business pays off the loan, you'll want the lender to terminate the UCC filing. If it doesn't, and you apply for a loan with a different lender, that new lender could see the UCC filing and turn down the loan.

Because lenders might not terminate the UCC filing, or it may not get removed from your report, you'll want to check your report every few months  through places such as Experian or Dun & Bradstreet. While costs for checking a report can vary, Experian offers a CreditScore™ Report for $36.95. If you see a UCC filing on it that shouldn't be there, ask to have the information updated and the filing removed.

When you check the credit report on your business, it is considered a soft inquiry, and does not affect the business credit score of your company, according to Experian.

If you want to continually watch your credit, Dun & Bradstreet offers a service that allows you to monitor your scores and rating. By consistently monitoring your business credit, you can see what factors impact it, make sure all of the information listed about your company is correct, and receive alerts about any changes made to your business credit file.

6. Missing details

When applying for a small-business loan, the lender you get in touch with might want to see clearly laid out financial information and a business plan. If you aren't able to show a clear understanding of your company's cash flow, revenue and profitability, you might not get approved.

Before advancing or lending money, go over statements and plans in detail. “Initially, we will speak to the merchant about their business,” explains Darren Schulman, chief operating officer of AmeriMerchant, a provider of alternative financing solutions for businesses. “It's crucial that all information is up-to-date.”

Getting a solid grasp of what affects your company's credit, and staying on top of those factors, requires time, notes Dunn. To get started, consider setting aside small segments, such as 15 minutes a day, to focus on your business credit. “The more attention you pay to it, the better it's going to get,” says Dunn.