Suppliers increasing scrutiny and cutting off risky customers

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 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 and Experian. PredictiveMetrics, a firm that advises trade creditors on risk, has seen client inquiries triple over the past three years.

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