Cleaning Up Your Company's Bad Credit Profile

How bad is your company's credit? You may not think about it much, but you can bet your suppliers do. A bad credit rating can damage your company is several ways:

• Loss of eligibility for commercial credit. Bank loans are out of the question if you run afoul of your responsibilities.
• Having to pay cash for everything. Paying in cash ties up your working capital and impacts your cash flow. You'll lose access to the 30-day, 60-day and even 90-day "loans" that trade-credit customers enjoy.
• Loss of "early payment" discounts. Many suppliers offer customers significant discounts to encourage payment before the official due date on their bills. If you're a cash customer because of credit problems, you're unlikely to get this discount.

To find out where you stand, order a credit report. See what it says about your company's state of financial affairs. It's a good idea to do this periodically to make sure the information is correct and current.

If you don't like what you see, don't panic. Bad company credit, like problems with personal credit, can be repaired. The best way to start is to talk with your creditors before your problems get out of hand. The goal is to arrange a payment schedule that is reasonable and fair to both sides.

If you find yourself awash in red ink and simply can't pay your bills, act quickly to rebuild your credit. There are a number of steps to take, with bankruptcy as a last resort.

As soon as you realize that you cannot make your payments, contact your creditors at once. If you have paid your bills promptly in the past, creditors may be willing to work with you to set up an alternative payment schedule. Do not wait until your account is referred to a collection agency to take action. You can ask creditors to extend the deadline for payment and to change the payments so that you can afford them. Expect to pay a "carrying charge" or higher interest on overdue accounts. The faster you act, the better terms you're likely to get. If you can successfully complete a repayment plan, many creditors will continue doing business with your company.

Sometimes, credit problems aren't due solely to a cash crunch. Mistakes, misunderstandings and structural issues within your company can tangle your credit accounts. If there is a snag, again, first try to deal directly with the creditor. Then look internally for problems that may have contributed to the situation. Late payments are often linked to improper handling of paperwork, incorrect addresses, computer malfunctions or improperly trained employees.

A lot can go wrong on the paperwork front. Are you receiving your bills -- are they being sent to the right address and to the right person? Are your checks being received by the right department and the right person? Is it clear when payments are supposed to be made?

Do you have someone in charge of paying bills at your office, or is there a chance that they could slip through the cracks? Establish workable guidelines for handling bills, invoices and payments. And then stick to them.

The key to making it back to a good credit rating is to show an ability to meet commitments. Don't take on more challenges than you can handle, even if it means sacrificing in other areas.