According to credit reporting agency Dun & Bradstreet, the June quarter came up grim for Australian businesses and particularly small business repayment terms. The number of businesses paying their bills on time fell considerably. It is predicted this will have a flow on effect to the whole economy. We look at Dun & Bradstreet’s report, the ramifications for those individual businesses when it comes to commercial and personal credit rating defaults, and offer some simple ideas for managing business cash flow and keeping a clear credit file.
By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and www.fixmybadcredit.com.au.
According to the latest Dun & Bradstreet Trade Payments Analysis – examining the ability of firms to pay their bills, and pay them on time – the number of payments falling within the standard 30-day term fell 16.5 per cent quarter-on-quarter.
Further underscoring the deteriorating conditions faced by businesses is the performance of small businesses, which recorded the biggest deterioration in payment terms of 2.2 days. Businesses with between one and five employees are now operating under an average term closer to that of larger firms, at 53.2 days.
Dun & Bradstreet attributes simple lack of cash flow as the reason for the decline in businesses meeting the standard 30-day term.
D & B Director, Adam Siddique, says cash flow issues within the small business sector will have a significant knock-on effect to the rest of the economy.
“It is particularly concerning that SMEs are waiting longer to be paid, and as a result are taking longer to pay their own bills. Trade credit constitutes a significant and critical portion of non-banking finance. When this is delayed, it withholds millions of dollars from businesses and the wider economy,” Mr Siddique said in a statement to the media .
“Small business payment terms now more closely resemble those of a large corporation, however small operations are less equipped to manage for cash flow issues, particularly if they are waiting more than two months to be paid for goods and services.”
In addition, two-thirds (62%) of all trade payments were late during the second quarter.
The number of severely delinquent payments (90+ days overdue) also rose noticeably during the last 12 months – up 13 per cent since the June quarter last year.
Mr Siddique predicts economic uncertainty and conservative consumers will continue to impede cash flow for businesses through the rest of 2012.
He warns businesses to remain focused on the ‘fundamentals’ such as cash flow.
“A proactive approach to risk and receivables management can often prevent a situation where businesses wait months to be paid,” he says.
With the threat of delinquency facing many more commercial credit ratings in the small business sector, it is important to realise the connection to personal credit ratings that can often follow the small business default.
Small business owners who allow overdue accounts to become the norm during the course of business could be unaware of the ramifications for not only the future of their commercial credit rating, but their personal credit rating as well.
People should not take trade credit lightly, as it can impact both credit files. This applies to both outgoing and incoming accounts. Dropping the ball on either is not the best way to ensure repayments continue to be made within standard terms of trade. If repayments are delinquent, creditors can place defaults on the business credit rating. But often the owner finds out as Director this is tied in to their personal credit rating as well.
Long after the business problems are over, the owner can be haunted by this bad credit and denied the basics for their family – mortgages, car loans, credit cards, even mobile phones for 5 years. For someone recovering from a business failure, this can be completely debilitating, particularly if savings have previously been thrown at the business to try to keep it afloat.
Here’s some ideas for the best ways a business can keep track of its cash flow and stay in the clear with their credit rating:
1. Pay all accounts on time. Have systems in place whereby credit cards and all bills are paid on schedule if not by the Director then by Administration. If the business is running behind, creditors need to be contacted and payment plans possibly worked out before the due dates to best avoid a default listing.
2. Ensure all accounts are paid in on time. Chase up bounced cheques and failures to pay immediately. Too many accounts left unpaid can leave businesses short on cash and run the business into the ground if left to continue. People should regard any client non-payment as potential risks to their credit rating. Develop a tactful system for retrieval ahead of time – reminding clients of the risks to their credit rating by defaulting on payments. If overdue accounts go beyond 60 days, businesses should notify the account holder in writing they will be referring the non-payment to a credit reporting agency.
3. Consider credit checks for all potential account holders. As suggested by Sue Hirst in her article ‘Why You Need Good Terms of Trade’ (My Business Magazine August 2010) business owners should consider implementing a system of credit applications for potential clients who request a major account. This involves the business requiring a credit check on the prospective account holder with one or more of the major credit reporting agencies prior to undertaking a credit account with them.
4. Regularly obtain a copy of both credit files –it is free for both consumer and commercial credit files once every year from one or more of the Australian credit reporting agencies. This will alert the owner early to any inconsistencies or errors on either business or personal credit files which could see their ability to obtain credit in jeopardy. If there are wrong defaults or mistakes on either the commercial or consumer credit file, it is important to address those inconsistencies immediately – and before it is a matter of urgency.
5. Keep credit card limits within a set budget as specified by the needs of the company. Don’t be tempted to set a lofty limit to business credit cards as it may encourage needless spending and blow out the business budget.
6. Be wary of excessive credit enquiries. People should get their credit health checked before applying for new credit, and only apply for credit they have full intention of pursuing. Some lenders are rejecting loans for as little as two enquiries in 30 days, or six enquiries within the year.
7. Most importantly, monitor accounts regularly. Business owners still need hands on knowledge of the business’ expenses. Check accounts are being paid and check receipts and credit card statements regularly.
Bad credit attached to your business?
If you are suffering with a bad credit rating, or have errors or mistakes on your credit file impacting your ability to get business credit, it would be well worth investigating whether you are suitable for credit repair.
The criteria for credit repair success is generally people who have a credit listing that contains an error or errors, or people who believe their listing is unjust or incorrect.
By engaging the services of a professional credit repairer, you are giving yourself and your business the best possible chance of being credit active again.
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