You apply for 30 day credit terms with a key supplier to ease your cash flow problems, and you get a negative response because they have checked your credit rating with one of the rating agencies like Equifax, and have found it deficient. Even the best businesses can arrive at a credit rating problem, because while sales can be good, cash collections may be stretched and leave the business with creditor payment gaps. Small businesses selling to large retail operations often find themselves in this unfriendly predicament. The big players may find it convenient to stretch their payments beyond even 120 days to safeguard their own cash flow requirements. Panicking will not solve anything, and credit repair can be achieved without resorting to outside specialists, who will normally charge high fees. There are a few basic strategies that can be readily initiated to stave off more serious problems:
Get a copy of the credit report – Find out precisely what the credit report contains. Check for any egregious entries that stand out in your analysis. Get help from your accountant to pick out financial discrepancies. Immediately advise the credit agency by e-mail or fax and provide all the supporting documents in an attachment. They may get back to you for more details but at least you are on record that you disagree with their data. Follow through on any requests for more information until the matter is resolved.
Keep your creditors in the loop – If there are no errors in the credit agency report, and you have problems paying your creditors on time, it is best to inform them at once, and try to negotiate a deal where payments can be stretched over a longer period of time. In most cases suppliers, and even banks, will make a deal that ensures an eventual collection of the debt owed. They realize that if they take the matter to court and win, they may still have to negotiate a protracted repayment scheme. Most would rather accomplish this without the added legal expenses involved in suing. But once you make a deal it is essential that you stick to your negotiated commitments.
Get it in writing – The agreement you negotiated must be made in writing so that there is a paper trail should any problems arise in the future. In most cases if you stick to your end of the bargain there will be no further repercussions.
Create a cash flow budget – Establish a six to twelve week detailed cash flow budget that specifies all the revenues and expenditures on a weekly basis. This is best accomplished with a spread sheet that compares the budgeted figures to the actual. Correct any discrepancies between the two by carefully matching cash collected to expenditures. Pay the absolute essentials such as wages, salaries, utilities on time and stretch other payments where you can. Review all the fixed expenses and evaluate whether they are really needed. Initiating a Zero Budgeting approach to justify all expenses is a good way to trim costs. Above all, cut down on all extraneous expenses such as entertainment.
Cut down on credit card use – Minimize the use of your own and other company credit cards. Force yourself and your employees to set a monthly limit on credit card spending. Eliminating some employee cards will result in better accountability. Reduce the number of company cards in circulation by 50%, starting with the ones that carry the highest interest rates. Research the credit card offerings made by other banks and financial institutions to see where you can get better rates.
Get a debit card – while you are doing everything that you can to pay off the outstanding debt you can continue to build a positive credit rating by acquiring a debit card. This facilitates payments and prevents a further build up of credit. It forces a more calculated approach to cost controls. The debit card taps into your company’s cash reserves and prevents an accelerated debt overhang.
Sign up with a credit union– these financial cooperatives offer easier terms and better interest rates than banks. If you are shut out from the big bank credit pool this is a good path to a possible bridge loan while you get your cash flow under control. Remember that you can’s solve your problems by seeking more credit. Cash flow problems must be tackled by disciplined cost controls, cash flow budgets, revenue growth, and improved productivity.
Stick to a plan – You can transform your bad credit rating over time, if you are able to stick to a carefully planned budget, which will guide you for the short and long term. If you progressively rehabilitate your payment history it will make the desired positive impact on your credit score.
Avoid bankruptcy – Better to repair your credit over time than to seek bankruptcy protection from creditors. This should be the very last resort, when everything else fails. Bankruptcy places a large stain on your personal credit rating, and will make it almost impossible to obtain any credit for a period of 7-10 years. The above DIY approach provides the basic guidelines that lead to improved cash flow controls, which can keep your business afloat and thrive in the long run.