In case our posts haven’t given it away, we’ve been watching the small business credit crunch in earnest over the past year. While the central theme always seemed to be same – big lenders get increasingly stingy, leave Main Street mom-and-pops starving for credit – our own data and our conversations with credit pros suggested that there was more to the story. A lot more. In contrast to what we were reading in the papers or hearing from the White House, it appeared that while tighter credit conditions were indeed hurting small businesses, loans were not necessarily their primary concern. Or even the primary culprit in limiting growth. This week, on the heels of a report from the National Federation of Independent Business (the NFIB), it looks as though the mainstream media may finally have turned the page. And at long last, we’re starting to get the rest of the story. We are also seeing more commentary around the great recovery divide between big businesses and small business—we’ve been tracking a similar gap for many months now as the payment behavior of big businesses has returned to a somewhat normal level while small businesses are still feeling the pinch. A few of our favorites from the week:

BusinessWeek: A Lifeline of Credit for the Recovery

Business Outlook columnist Jim Cooper’s piece (and accompanying video interview) cites the prominent NFIB report claim that lack of demand, not credit, is hurting small businesses while offering evidence of improving credit conditions that should help growth initiatives once demand picks up.

Time: Small Business, Key to Recovery, is Still Hurting

Janet Morrisey’s piece, as the headline suggests, was decidedly less rosy. According to the article, small business sales have declined 3.8% in the first 10 months of 2009. Transportation and warehouse business, manufacturing, wholesale trade, and retail trade took the brunt of the declines, with sales plunging 16.7%, 13.8%, 10.4%. and 6.7% respectively in 2009. Morrisey quotes William Dunkelberg, chief economist with the NFIB, as saying, “Capital-spending plans are at 35-year lows and inventory-investment plans are at 35-year lows. They’re just not borrowing — they’re not asking for it.”

Small Business Trends: Small Businesses: We need customers, not loans

Anita Campbell, one of our favorite small business advocates and the colorful editor of Small Business Trends, wins the prize for best headline. Her piece focuses exclusively on the NFIB report, hitting on specific findings in employment, capital expenditures, access to credit, and sales.

Please send us your favorites. Have a good weekend and remember to buy local this holiday season – you might just solve the credit crunch.

The small business credit crunch has justifiably been one of the primary news themes during the recession and slow recovery. And while stingy, risk-adverse credit behavior from banks and lenders is often labeled as the primary culprit, some small business owners may actually be exacerbating the credit crunch, albeit more due to ignorance than intentionally bad habits. Cortera, a community based business credit bureau, publishes a monthly index on small business credit behavior – trends on A/R and payment activities – and the data continues to show that small businesses have become increasingly delinquent in paying bills in a timely manner. You could say such behavior is a result of dwindling cash due to less access to credit, but it’s also a result of well intentioned efforts to extend working capital by holding cash as long as possible. Unfortunately, such behavior is hurting their credit viability, making it even harder to secure loans and credit lines. So just how can businesses maximize the limited capital they have while improving their credit rating? Here are three simple tips:

1. Get Your Suppliers Involved – they’ll love you for it. If you are financially healthy and meeting your own profitability goals, your suppliers and vendors will obviously benefit as you grow and thrive. Encourage them to report to the major credit bureaus (Dun & Bradtsreet, Experian, Equifax and Cortera) so that you get credit (no pun intended) for regularly paying your bills on time.
2. Pay Your Vendors and Suppliers on Time – it might even save you money. Sounds simple, but if you are not paying your bills in a timely manner it will negatively impact your business credit report and will eventually hurt your ability to obtain business credit in the future. Many vendors also provide discounts if you pay early, so if you get in a cash flow habit of paying before the invoice is due, you’ll often save 2% or more off your invoice.
3. Communicate, Communicate, and Communicate. Whether you are extremely profitable with plenty of cash on hand or struggling to pay your next invoice, keeping your suppliers in the loop goes a long way in negotiating your terms. Never go completely dark and stop returning inquiries. And never stretch out payments without being up front and transparent with your suppliers as to why you may need to pursue such a tactic. This will alienate your suppliers and could lead them to cut you off completely, further handcuffing your business and potentially causing you even more pain.

Obviously these are only three of many best practices. Have other ideas or tips? We’d love to hear from you.

When we launched the Cortera Credit Exchange our primary goal (it still is) was to drastically augment the amount of information available on private companies by expanding the information sharing between credit grantors of all forms. I’m happy to report that we are seeing that exact behavior every day. Another intriguing trend is one that mirrors what we, as consumers, have seen since the introduction of reviews and ratings features across product and service sites: Enthusiastic participation when it comes to their worst experiences. In our case, we’re seeing a lot of activity around the reporting of businesses worst payers—their deadbeats. In the traditional world of business credit reporting, a credit bureau should achieve the same goal, but it can take weeks for the deadbeat tradeline to show up on a credit report.

Obviously in this economy, as I have reported in the past, there continues to be a large and growing group of companies well beyond their terms. Collectors are turning to the Exchange to report their deadbeats and notify the debtor that they have been publicly reported online. It seems simple, but in a world where everyone is online and reputations are everything, this technique could be just the approach that will get your money in the door. Here is a sample of some of the more colorful ones we’ve seen over the last few weeks:

• “Pays a fraction of balance. Watch this company they must bounce from provider to provider.”
• “This company does not pay subcontractors on commercial projects. They have numerous lien and foreclosure actions in the state of Colorado.”
• “Still working with Owner to settle this account. I am hopeful since we started at $70,000 and are down to $13,500.00. Will not do business with them again.”
• “The A/P dept and Office Mgr. refuse to talk to me or return emails and Voice mails. The owner/Pres. also refuses to reply to emails and voice mail.”
• “Sitting in a receivership right now. These clowns do not pay anyone promptly. Have successfully fought off a mechanics lien against the company in July 09. Currently 91 days past due, and an active litigation, every single payment has required collections activity to get paid.”

Have a few deadbeats in your customer portfolio? Report them here – it will feel good (trust me).

The S&P is up over 50% since its March 2009 lows and yet for most of us, the leading indicators and large company earnings seem to defy the reality on Main Street. Newsweek offered a view on why such a gap may exist – and some indicators are emerging to focus on small business sentiment — but the fact remains that most prominent economic indicators fail to paint a true view of Main Street conditions. Last month we started publishing a small business index that takes a shot at filling the gap. Based on same criteria lenders and businesses use for determining credit viability, the SBI provides a view into the cash flow on Main Street. And just as Newsweek paints the picture of the Wall Street – Main St gap, the Cortera SBI™ shows increasingly divergent behaviors between the largest of businesses and the nation’s millions of small companies.

The result is a one sided recovery. The latest data shows that while big businesses have returned to their pre-recession levels of two years ago, small business still remain over 28% higher (paying bills later) than our October ’07 report numbers. Simply put, small businesses are still paying slower than big businesses in an effort to manage their cash flow. Without any additional forms of lending at their disposal, slowing payments is their last resort. The gap, while narrowing slightly in our October Report, still stands at over 38% slower for small businesses as compared to big businesses.

A few weeks ago I attended a credit group meeting that I help manage with a NACM affiliate. Like many credit groups, we gather 2-3 times a year to discuss a list of submitted customer accounts from the various members. Meetings for these offline professional social networks follow a straightforward process. The accounts are grouped together in a spreadsheet so that each member can see their most recent trade with a specific customer as well as others in the credit group. The group leader then moves through the accounts and discussion ensues, as necessary, covering a range of insights. The process is remarkably efficient and more importantly, the information shared is unlikely to ever show up on a credit report – which is really the whole reason such credit groups exist.

What made this particular meeting standout for me was that for the first time in memory, there were a handful of new members that had never been to this credit group (or any other) before. When a curious but slightly timid newcomer was tapped to discuss one of his accounts first, he requested “Can someone else go first? I’ve never been to one of these – I want to learn how it works.” It was a reminder to veterans that while this may be an essential part of how they do their job, the process of sharing such information – and the realization of resulting benefits – is something that needs to be experienced to be fully understood. Following the meeting, a 30-year veteran of the group recalled his initial experience and why he’s remained committed to collective information sharing throughout his career. Put simply, he felt like it was his duty to pass along his knowledge, techniques and even his network to the next generation, just as the previous generation had done the same for him. And he credited the group and extended network of contacts it has created with an ongoing ability to perform his job at a superior level.

And therein lies the key to such networks — why members remain so committed. Credit and collections decisions are a year-round effort. On the one hand, such meetings provide a period, invaluable opportunity to gain insights that simply don’t show up on a standard business credit report. But equally if not more importantly, they offer the opportunity to broaden a network of peers who can provide similar insight on a when-needed basis.

Given such the added benefits at a time when so many businesses are looking to reduce risks and improve cash flow, we want to know: Are you seeing an uptick in membership and participation in your credit groups? Are you joining new ones? Do you find yourself tapping into such networks more often? We’d love to hear from you. How are you leveraging your credit network?

After four consecutive months of improvement in our Supply Chain Index numbers the October 2009 Report shows a reversal to levels not seen since early 2009. While this might be a cause for concern, this increase is likely part of a normal seasonal trend that we have tracked for several years now. Corporate slowing of payments to their suppliers is common for companies managing their working capital during the holiday season. The SCI spike, which occurs each fall season, typically comes back down following the increase in cash received during the holidays, as retailers and distributors pay debts owed to the manufacturers.

However, we usually see this cycle of jumps in DBT in November and December—this year we are two months early. The question is why the early move? We could be seeing the impact of big businesses using their market weight and strong cash position to push out payments. Given this growing cash hoard by large companies, the movement in the SCI could be showing a fading confidence in the recovery. Or we could be seeing the effects of tight credit markets for small businesses forcing them to manage their cash flow by slowing payments to their suppliers to make it through the holiday season.

With a mix of news hitting every day it is fair to say the economy is trying to find a steady course. The most recently released October 2009 Manufacturing ISM Report On Business supports the case of economic recovery as manufacturers – the early stage supply chain stakeholders — have increased output ahead of the holiday season and appear to be more confident in consumer spending. Yet today’s bankruptcy of CIT and concerns about consumer spending argue that we are in for a longer recovery. The next few months of data will bring further clarity.

A few highlights from this month’s SCI data:

• Comparing the September 2007 (6.8 days) numbers to the September 2009 (9.56 days) numbers and you’ll see that the Supply Chain Index is ~40% higher
• Commercial accounts receivable debt greater than 30 days past due is also 50% higher than September 2007
• We’ll be watching closely to see if the 2009/2010 holiday season matches past cycles, with DBT quickly dropping back to pre-holiday levels

Earlier I blogged about a story by George Cloutier in BusinessWeek’s The Turnaround Ace blog. Now that I’ve had some time to fully digest it, I have to say his advice is not only bad, but it’s also flat out wrong. Worse, it’s downright dangerous. It’s exactly the kind of counsel that can cause confusion among small business owners and frankly, its publication is irresponsible. Scan through the growing list of scathing comments about this article, and you’ll see I’m not alone. There are many troubling aspects of this article, but let’s hone in on a few:

Troubling Statement #1: “Never Pay Your Vendors On Time”

This is an unfortunate headline in an advice column. Instead of focusing on the true problem (“…but payment on outgoing invoices isn’t getting collected for months. One large organic foods chain owes six figures on an order it placed six months ago”) of the invoices that they are owed to this small business, Mr. Cloutier is focusing on spreading cash flow problems to other businesses. Shouldn’t they work with their customers to speed payment and/or perhaps consider putting these customers on cash only plans until the payment pattern improves? The true issue here is a collections problem. There is definitely a cash crunch for many small businesses, and I feel their pain, but this is not the way to solve their problems—ultimately it will only make things worse.

Troubling Statement #2: “Wendy is balking at the idea because she is under the false impression that paying on time will help her maintain a good credit rating. She also wants to keep her good relationship with vendors. But this has nothing to do with her credit score.”

This is totally incorrect. Wendy is right to challenge Mr. Cloutier because her instinct is right on the mark. If you slow or stop your payments to your suppliers it will most definitely impact your business credit rating. Payment behavior is how these scores are generated at all of the major bureaus. That fact is, suppliers will cut you off and will put you on cash terms if you drag your payments too far out.

Troubling Statement #3: “Same goes for your landlord. Pay him late, too. He’ll scream his mortgage is due, but that’s not your problem. He won’t evict you because he needs the rental income, especially in these times. Send him a check at the end of the month, not the beginning. He’ll soon get used to it.”

Again, bad advice. If you start paying all of your core bills late, this is a major signal that you are struggling and close to failing. Trade credit for small businesses is especially hard to earn and establish. If you slow payments across the board this could be extremely damaging in the long run. The pass-the-buck tone by Mr. Cloutier is just appalling. If every company in America started doing this, the whole US economy would grind to halt.

George Cloutier’s Advice: “Over the years, my turnaround firm has found millions of dollars in extra cash for companies by delaying payments this way. In good times and bad, it’s simply good business practice to stretch out payables…All the big retail chains do it, so why shouldn’t you?”

He is right. Big companies do use their market weight to force unreasonable terms on their suppliers, but is this really the message that we want to send? Let’s tell every business owner in the country to just ignore the terms of their invoice and pay late. While we are at it, let’s just stop paying our mortgages and credit card bills, too. The banks are hurting. I’m sure they’ll understand.

The fact is there is a huge difference between a big company and small company when it comes to credit and credit evaluation. Many business credit reports on big companies do in fact reflect poor payment behavior. But when it comes to credit analysis, a large public company benefits from public financials, large bank credit lines, public debt and public ratings that ultimately prove their credit worthiness. A small business does not have this luxury – they will be judged on their payment history, their trade references and other public records. If you stop paying your suppliers in timely manner, your credit report and trade references suffer, and you may find that your well earned trade credit has dried up. Keep up the pattern and you may even end up with a lien or two filed by a supplier.

Small businesses have enough to worry about and getting bad advice from a supposed expert, shouldn’t be contributing to their worries.

What do you think? Does his column bug you as much as it does me?

An article in BusinessWeek’s Turnaround Ace blog entitled “To Improve Cash Flow, Stall Payments to Vendors” is causing quite the reader negative reaction. The gist of the article: You should pay your vendors as slow as possible to help manage cash flow (in good time and bad). For the profiled company in the article they are suffering from extremely slow payment by their customers, so instead of focusing on collecting these payments faster, he is arguing that they should push out their own payments. Here is sampling of some of the reader comments:

“This guy is part of the problem we have with our economy. Wendy and Ted need to stick to their business ethics and demand others do the same. If I slow pay my suppliers, they stop selling to me and send me down the street to the higher priced vendor to slow pay them. If you want good prices, you have to pay your bills.”

“Yeah no wonder the country is in a s#@t storm.”

“This is the worst business advice I have ever read. Period. You want to know the number one problem our business has in this recession? Getting paid in a timely basis for work performed. Want to know why? Because of fine, upstanding people like “Wendy and Ted” who don’t pay their bills on time. I honestly can’t believe Business Week considers this to be great advice.”

“I really couldn’t believe what I was reading…Pay promptly is the best way..and I agree with all the ones who have written opposing the practice of delaying payment..I have been in business a long time …if start off doing it right ..it will work..I disagree with delaying payment unless it is absolutely necessary.”

“Congratulations on writing a column that illustrates one of the many reasons this country is going down the toilet.”

“I agree with everyone else here. This is an atrocious way to conduct business. This will eventually lead to mass layoffs of people. I pay all my bills on time. And if my customers don’t pay in time then I cut them off credit as well. No wonder the banks have cut so many businesses off of credit.”

There is certainly some passion there. As I have blogged about in the past, there is a rough “dual credit crunch” that is squeezing small businesses and hurting their cash flow.

What do you think? Is slowing payments as form of a short-term loan a valid technique? Or is it one of the primary reasons that we are still in a recession?

Last week I received an email from a customer asking a simple question.

“How do we go about contributing credit information about companies? If we run into problems with a customer, we would want the market to know what problems with payment we had.”

The standard and historic answer that most credit bureaus like Cortera would give is this:

“Please send us a cut of your monthly accounts receivables information according to our standard format and we’ll incorporate it into our database.”

This is the way it has always been. Sounds simple enough – right? Well, it is not. For most companies this task requires some kind of technical expertise to get that information out of their accounting system and into a format that a bureau can ingest and then report back on a credit report. Plus, this can take weeks by the time the request has been made to IT and then the information actually shows up on a credit report. In the mean time the debtor could continue to be granted credit without the greater market having any knowledge of their payment problems. Obviously we are talking about reporting on customers that are well past due and are not likely to be a customer again – in common terms we are talking about deadbeats.

Of course my answer is different now.

My response back:

“We just launched a new free website that makes reporting on a specific company and telling the market about them very easy. You can go to Cortera’s community ratings website and from there you can search for the business that is giving you trouble and use the “Rate Company” tab to provide your payment experience and comments.”

Within 5 minutes he was able to report on the two customers that were giving him trouble.

Have a few customer (or should I say ex-customer) deadbeats in your portfolio? Tell the world about yours and who knows you must just catch one reported by another member before you get in too deep.

The good news: The vast majority of your customers and partners are paying their bills on time. The bad news: The delinquent minority is only getting worse.

Having access to the A/R activities of millions of businesses provides us with a unique view into the nation’s cash flow. And since the beginning of the year, we’ve been seeing a steadily improving trend in the amount of corporate accounts receivable debt that is current (see chart 1 below). In fact the vast majority of debt tends to be current – most companies simply pay their bills on time. Even at its worst in February of this year, on a national basis 81% of debt was current. Today that number stands at approximately 83%.

However, companies still must deal with the other 17% of businesses that fail to pay on time. While this number is not dramatically out of line, we’re seeing unsettling growth in the amount of debt over 90 days past due (see chart 2 below). This is not surprising given the well reported growth in amount accounts sent to collections agencies since the recession started, but it is causing finance staff and business owners to be more diligent and get more creative when it comes to dealing with a deadbeat drag.

Have you seen your 90+ days aging bucket growing? Please share a story or two on how you are dealing with this growing problem.

Chart 1: Percent of Current Commercial Account Receivable (US National Average)

Chart 2: Percent of Over 90 Days Past Due (US National Average)