With that in mind, here are five simple steps every company should be proactively taking in 2010 to put themselves in the best possible credit position:

1. Establish a credit file at the major credit bureaus. Many years ago there was only one major bureau – Dun & Bradstreet. Today the business credit reporting landscape has changed, so make sure you establish a credit file at ALL of the major bureaus (Dun & Bradstreet, Experian, Equifax and Cortera)
2. 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 (see above) so that you get credit (no pun intended) for regularly paying your bills on time.
3. 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.
4. Communicate, communicate, 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 – and keeping a positive credit history intact. 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, lead them to cut you off completely, or worse, encourage them report such delinquencies to the major credit bureaus. Lack of transparency will handcuff your business and potentially cause you even more pain.
5. Monitor your own credit report. Just like you monitor your personal credit report, you should do the same for your business. Small discrepancies or disputes can mean the difference in receiving business credit or being denied.

So if confidence is not behind the improving payment behavior, what exactly IS driving down delinquencies? While it’s hard to point to a specific answer in the data – and while one month hardly constitutes a sustainable trend – here are a few possible contributing factors:

1. Deadbeat Darwinism: We’ve said it before and we’ll say it again. The best way to ensure timely payments is to report, proactively deal with, and do the proper reference checks to avoid deadbeat clients and partners. With growing sensitivities to such risks and forums like our own Cortera Credit Exchange, which make it easy to ‘out’ such delinquents, small businesses may taking the necessary steps to avoid such problems. Serial deadbeats and companies in trouble are therefore less and less likely to be mucking up the system.
2. Past due debt off the books: Another flavor of deadbeat Darwinism, but this one at the tail end of the cycle. With little or no hope of recovery long outstanding debt – overdue bills – well past 90 days DBT, many businesses simply write it off. Thus, this delinquency data is no longer weighing on the average.
3. Improved credit management: Perhaps business owners are more sensitive to increasingly stringent lending conditions – and how business credit reports are built – given the notoriously risk adverse position and tight lending habits of banks these days. Maybe they’ve taken our advice and realized that the best way to self manage working capital in the absence of abundant credit availability is to ensure that they and their partners all pay their bills in a timely manner, thus optimizing cash flow throughout the entire system. Regardless of the reason, we may be witnessing an increasing emphasis on better credit management habits for Main Street.

As always, another month’s worth of data will go a long way toward sorting this out. But in the meantime, what do you think is contributing to a sudden improvement in timely payments? We’d love to hear your thoughts and ideas.

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.

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 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.

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?

“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?