Yet Another Blow to Small Business Credit

Suppliers are increasing scrutiny and cutting off risky customers

By Nick Leiber

With revenues at his six-employee construction business on track to jump 10 percent this year, to $2 million, Gary Desilets thought he'd be able to get credit pretty easily. As it turns out, securing financing is harder than he expected because his trade creditors—suppliers that let companies buy now and pay later—have been scrutinizing his Bristow (Va.) business more closely. In April the company that sells him concrete, lumber, and other building materials slashed his credit line from $200,000 to $20,000, and Home Depot (HD) cut him to $8,000 from $20,000. "Our mistake was believing the hype about not worrying about your debt as long as you can service it," Desilets says. "That's a bunch of hooey unless you're a big company with a lot of resources."

Only about 20 percent of the short-term credit for small businesses comes from banks. Suppliers make up most of the rest, according to the Credit ­Research Foundation, a trade group in Columbia, Md. Now with banks ­choking off credit, many small companies are pressing vendors for more time to pay their bills, in effect asking for a loan to tide them over until they get paid by their clients. "Small businesses have been forced to reach out to trade creditors and begin to utilize them as bankers," says Lyle P. Wallis, vice-president of the Credit Research Foundation.

To make sure they don't get stiffed, trade creditors are taking a closer look at customers that ask for credit. They are using sophisticated risk analysis to ferret out and cut off customers who are least likely to pay their bills. Wallis estimates that over the past 18 months trade creditors have doubled their use of scoring tools such as credit reports from Dun & Bradstreet (DB) and Experian (EXPGY). PredictiveMetrics, a firm that advises trade creditors on risk, has seen client inquiries triple over the past three years.

It used to be that business owners who were late on small debts could work out a deal with suppliers, but the analytical tools leave less wiggle room. A plumber working on new commercial construction that may never be completed might now be categorized as a higher risk than a repair plumber who does small jobs in existing homes and is more likely to be paid by his clients. "We [now] get personal guarantees from the business owner, all partners, and all partners' wives," says Terry Michnya of Barrons, the building supply store that cut Desilets' credit line. It requires a payment pledge from any customer that goes 30 days past due on an account. "We choose not to be a bank for builders," says Michnya.

Few trade creditors are willing to cut off buyers entirely because they fear their customers would simply stop coming. "Trade creditors have to step in or they lose the sale," says Rob Olsen, chief risk officer at Wright Express Financial Services (WXS), a Salt Lake City firm that provides payment processing for truckers and other small businesses across the U.S. Still, he says, they're far more careful about assessing the risks. "They know their customers better than they did in the past."

The bottom line: Trade creditors are starting to pay more attention to their small business accounts, further tightening credit.

Leiber is the Small Business Channel Editor at BusinessWeek.com.

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