Many small businesses do not report their trade accounts to credit bureaus. This presents a hazard for you—but also an opportunity you can use to prod some late payers to pay up.
When cash flow falls at a big business, its small vendors tend to be the first to start getting paid late. Since many small businesses do not know what they can do about it, they suffer in silence or rant endlessly at a giant against which they have no power.
This means anyone who uses bureau reports to check for late payments will not see any sign of trouble until it is so bad that even major vendors are not getting paid. That is a hazard to you, because it leaves you in need of some other way to find out whether you as a small business are likely to be paid on time.
But it is also an opportunity. If your small business reports to a national credit bureau, your ability to blot a delinquent customer’s credit record gives you some power. The largest customers may not be sensitive to it, but small to medium sized businesses are.
An Example of Getting Paid This Way
As an example of how this works, in the late 1990s a customer’s payment due in August did not arrive. When I called about it, they said it must be lost in the mail, and they could not issue a replacement until October. That plus public news told me everything I needed to know.
My customer’s shares on NASDAQ had recently lost about two-thirds of their value. Because the best employees got a significant part of their compensation in shares of stock, those employees were becoming disgruntled and some were leaving. To stop the hemorrhage of expertise, the company needed to either change its compensation plan (more cash, less company stock) or bring the share price up.
They chose the latter. To reassure the stock market, they accelerated revenue everywhere they could and postponed outgoing payments. That would artificially boost the next financial report covering the July to September quarter. That should make investors more comfortable and the share price would improve.
I told my customer that my company reported late payments to Experian. When they became 30 days overdue, my company would begin to report that. If they checked whether I was bluffing, they would find that my firm had done it before.
They quickly realized what would happen after I filed that report. Other vendors would see it and some would begin to demand cash in advance. That would make the next quarterly report look worse, not better. They paid. They never tried to pay me late again.
Why Doesn’t Everybody Do It?
If it is that easy, why don’t all small businesses file reports with credit bureaus?
A barrier stands in the way of small companies that want to report to credit bureaus. National credit reporting companies only accept reports in batches of hundreds or thousands at a time. Small businesses often do not have enough transaction volume to submit such big batches. But there is a way around this.
How to Jump the Barrier
Subscribing to a credit report bundling service is a way to get around that barrier. These used to be formally called consumer affiliate bureaus. They were independent credit bureaus that stored their credit files in one of the three dominant national credit bureaus. They have all been bought out by the credit bureaus with which they were affiliated and are now national resellers for the bureaus. There are not many, so do not be surprised if none are nearby. Your account can be opened remotely. Distance does not matter.
When you subscribe to the service, your business files reports with the service about the payment behavior of your customers. There is no extra charge for you to submit reports because you are providing data, which the service needs. The service collects so many small reports from businesses like yours that the total is large enough to pass the national credit bureau’s minimum. Subscribing also allows you to order and quickly get credit reports of the scope you need, at reasonable cost.
A subscription like this used to be easy and inexpensive to start. It is still inexpensive to maintain after you get it, but it is no longer easy to get your application accepted, and the startup fee has gone up. The general procedure to sign up is like this:
- Fill in and submit the Application and Agreement.
- Submit to an on-site inspection by a third party. This is now required for access to regulated products such as reports on business owners or consumers.
- Pay the initial fee.
- On a regular basis, pay an account maintenance fee, plus the fees for any reports you obtain.Report accounts receivable experience (good and bad) to the service so it can submit the data to the national credit bureau it represents.
On-site inspection is intended to weed out people who want to get credit reports for nefarious purposes instead of genuine business reasons. Credit data about consumers is subject to legal protections that do not affect credit data about businesses. If you want access to consumer data, the extra constraints involved increase the subscription startup fee.
Your accounting software might not include appropriate reports for sending accounts receivable information to the service you join, but creating an appropriate report should not be difficult. The types of reports to look for are:
- Aged Trial Balance
- Balance and Aging
- Customer Master List (if the service needs it)
The service you subscribe to will explain the report format they need so you can submit reports.
Wrapping It Up
By shopping carefully, you can subscribe to a service that also has a collections branch and can take over the pursuit of overdue bills if you wish. At the least, that reduces complexity for you. Getting credit reports, filing them and chasing unpaid bills all happen under one roof.
But with good procedures and the right tools, including the ability to file credit reports, you can usually get customers to pay before bills become so overdue that you need collection agents or courts.