Payment History Practice

The single most important factor that affects your business credit profile and score is your payment history. If you owe money to one of your vendors and fail to make good on your promise to pay them, the vendor may cease doing business with you. And if they do continue to do business with you, it is likely that the future terms of your business transactions will be less favorable. For example, instead of granting you 30 days to pay your invoice, the vendor may require payment up front, either in part or in full.

Even more important than the payments you make to your vendors is the payments you make to large financial institutions, like banks, credit card companies, and utility companies. If you fail to make a required monthly payment on time, it will be reported to a business credit bureau such as Dun & Bradstreet which will immediately have a negative impact on your credit score. Clearly, this can have much farther reaching negative implications than not paying a bill to one of your vendors.

In order to be considered on time, a payment must be made within the terms of the agreement. Whether the payment is due on receipt of the invoice or within 30-90 days following receipt of the invoice, it is vital that you make the payment in the agreed upon time. Paying early can also have a very positive effect on your credit score, for example, paying a bill in 60 days that isn't due for 90 days.

Making a payment a few days late is not going to undermine an otherwise strong credit history. Unless the payment is more than 30 days late, most companies will not report the late payment to the credit bureaus. However, a pattern of 30-daya late payments or worse can severely weaken a company's business credit history and score.

Strategies for Paying on Time

Most businesses experience a cash flow problem at one time or another. For example, the customers of that business may be late making their payments, so this means your ability to pay your obligations on time may be threatened. In order to avoid these kinds of situations, it is important to develop strategies to ensure that you make your payments on time, regardless of any cash flow problems you may encounter. The following are some suggestions for how to do this:

• Overdraft Checking - This is a feature that most financial institutions offer with business checking accounts to cover any negative created by writing checks for more than the balance in the account. Even though there are interest fees associated with this protection, it is worth it if it protects your credit score by keeping a late payment of your credit history.
• Automated Payments - Many times payments are made late simply through oversight. Establishing automated payments for regular obligations (like rent, tax payments, and insurance premiums) can ensure that these payments are made on time. Owners of small businesses can even set up payments on their estimated federal taxes up to 12 months in advance by using the Electronic Federal Tax Payment System (EFTPS) (www.eftps.gov).
• Negotiating New Terms - One of the most effective ways to avoid being late is to communicate with your lender as soon as you realize that your payment is going to be late. In many cases, lenders will be willing to give you an extension on your payment of up to 30 days. By renegotiating the terms of your payments, you can avoid having a late payment reported to D&B or other credit reporting bureaus. By simply renegotiating your due date to a timeframe that is more compatible with your receivables, you will protect your credit history and score. For example, if you typically receive payments on your receivables on or around the 10th of the month, you should try to arrange a due date for your payments on or around the 25th. This way you will have two weeks to deposit the payments you received from your customers and send your payment to your creditor with plenty of time before the due date. Another option to avoid making a payment late is to negotiate a new agreement with you lender to make a partial payment by the existing due date and get an extension to pay the remaining amount owed.
• Prioritize Payments - When you run into trouble making your required payments, if you are unable to renegotiate the terms of payment with all your creditors, make sure you at least pay the accounts that will be reported to D&B or the other credit bureaus in order to protect your credit rating. Clearly this is not a strategy that you want to employ on a monthly basis if you want to keep up the good business relationships you have with your creditors. In addition, you want to always make sure to protect your relationship with your vendors who are critical to your business, even if they will not report your payments late to D&B.
• Make Payments Over the Phone or Online - Many companies such as credit card companies, utility companies, and insurance companies will accept your payment over the phone or online. By providing your checking account number and routing number or a credit card number, you can authorize a payment so that the funds will be electronically transferred from your account. While there is likely to be a small fee for this transaction, it is nothing compared to the damage a late payment can cause to your permanent credit history and score.

Creating a Balance Sheet

When you apply for any kind of business loan, one of the first things a potential lender will ask you for is a balance sheet. This is a summary of your company's current assets and liabilities, including equipment and property owned by the company, accounts receivables, other funds owed to you, as well as any mortgages, outstanding loans, or accounts payables owed by you. By analyzing a company's balance sheet, a lender can get a feeling for the financial strength of a company.

Building a More Impressive Balance Sheet

Since your balance sheet is going to be a key component of every future loan you apply for, it is important to make smart decisions throughout the year in regards to your assets and liabilities. Here are some critical strategies to enhance your balance sheet:

• Keep Your Cash - When you anticipate that your balance sheet is going to be evaluated by a potential lender, try to keep your cash in your accounts rather than spending it on anything but assets that will be credited to the overall value of your company.
• Delay Writing Off Bad Debts - Since one of your business assets is your accounts receivable, you should keep all accounts on your balance sheet, even the ones that have not had any payment activity. This way, all of your potential incoming funds strengthen your balance sheet by increasing your assets.
• Raw Materials vs. Finished Goods - If you manufacture goods, remember that raw materials are worth less than finished goods on your balance sheet. If possible, try to convert your raw materials into finished goods before presenting your balance sheet for evaluation.
• Consider Leasing Expensive Business Equipment - Since the fees to lease expensive business equipment are not included on your balance sheet as a liability, you gain an asset for your balance sheet if you lease equipment rather than enter into a lease-to-buy contract.