The conviction that the ‘trade creditor’ would come to the rescue and fund businesses may no longer be the case. Trade creditors are now scrutinizing their credit applicants. While banks just make up about 20% of the short term credit for small businesses, the other suppliers make up the rest (surveyed by Credit Research Foundation, a trade group in Columbia, MD). But with banks showing more friction towards lending, small companies have their eyes fixed on private creditors for loans. They are also pressing vendors for more time to make their bill payments and also asking for loans so that they can keep afloat until they receive payments from 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, Credit Research Foundation. But the real difficulty arises with trade creditors slashing their loan amounts to borrowers. A microscopic analysis of creditors is being done by vendors before lending out loans to their customers. Gray Desilets, who runs a $2 million construction business witnessed a slash of credit line from $200,000 to $20,000 from the company that sells him building materials and $20,000 to $8,000 from Home Depot. Trade-creditors have increased their use of scoring tools as well. Products like ‘Dun & Bradstreet’s’ credit reports and ‘Experian’s Predictive Metrics’ have seen client inquiries triple in the last three years.
Earlier, it was possible for small business owners to work out a deal with suppliers that enabled them to clear their debts slowly. But now such negotiations are long gone, as trade creditors are taking steps to cut off customers who are less likely to pay bills. Trade creditors do however fear that by doing so, they might completely lose their customers. As Rob Olsen, chief risk officer at WXS, says “Trade creditors have to step in or they lose the sale.”
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