7-Mar-09 8:00 AM CST

Five Ways to Protect Your Credit in Tough Times

Take action to preserve your credit scores.

Most businesses are experiencing income declines. If you’re an entrepreneur, this probably means your personal income has also diminished. Since excellent credit ratings are essential for accounts of all kinds – from all-purpose credit cards to purchasing business equipment, automobiles, real estate, even insurance – it is essential to take action to preserve your credit scores.

While local vendors are likely to work with you when you’re in a pinch, national chains have uneven reputations for helpfulness. I heard from a reader who tried to negotiate with suppliers and creditors after her jewelry business sales decreased and she was overwhelmed by late payments. When you miss payments, credit scores drop rapidly. You are no longer in a strong negotiating position because creditors base their credit extension decisions on your credit scores.

If your income slows and there is a possibility you will not be able to meet your credit obligations, here are five steps to preserve your credit ratings:

1. As soon as you know your income will not be adequate to pay your bills, develop a worst case plan. While I prefer to think optimistically about finances, this is the time for a conservative [Call it negative if you must.] approach. Since you may only get one opportunity to renegotiate your accounts, you want the best terms for your business and yourself.

2. Examine your spending with a virtual microscope. When we are accustomed to sufficient cash flow, it can be difficult to recognize excess outflow for ourselves and our businesses. For example, if you eat out for lunch instead of taking it, habitually buy refreshments at convenience stores, make regular visits to Starbucks or the bakery or yogurt shop, and cannot resist a sale . . . there are dozens of places you can make effective spending cuts. Find any excesses; cut them. If you’ve never had to severely scale back spending, a true shift of consciousness is required for habitual buyers. It can be difficult because you acquire a different mindset when you spend for what is needed rather than buy what is wanted.

3. Share the situation with your employees. Ask for their suggestions. Enlist their help to recognize cost-cutting opportunities, which will get your business through these challenges and preserve their jobs. A team effort can produce more successful results than the efforts of the captain acting alone.

4. The tough step comes after you develop a new operating budget. Call your suppliers and business creditors while all your accounts are current. When you’re contacting a major company, ask to speak to a manager. After the person comes on the line, get the correct spelling of their name, ask for their title, and ask how you can reach them directly if you have follow-up questions after the call. Keep this information in your records. With small local vendors, you probably know the person you’re contacting. If not, ask for the accounting manager.

Explain that your business is slowing down due to the recession. Tell them you’re prepared to hunker down and make it through to better days and you’d like to enlist their help to do that.

If your supplier accounts have standard 30-day terms, ask to have the terms changed to 90 days until business conditions improve. You might have to compromise at 60. However, they may grant 90. If you’re able to pay invoices early, your business credit scores will increase. Having a time cushion for bills during an uncertain economy can provide stress relief while it preserves your positive credit history.

Major credit card accounts are likely to be more difficult to negotiate than vendor accounts with standard business payment terms because banks tend to be less accommodating, even today. With a true commercial credit card, which means you did not provide your social security number to open the account, you are more likely to get your interest rate reduced or terms relaxed than you will with an account where you’ve guaranteed it by providing your social security number. Again, talking with a manager can be key to achieving acceptable results.

5. Stop charging on credit cards except for small amounts you know you can pay in full each month. We have no idea how long this economic downturn will last. Due to the complexity and impact on foundation segments of the economy, the road to recovery is likely to be longer than we prefer to anticipate. You want as little debt as possible – in your business and personally. Don’t close accounts. Just use them minimally to keep them active on your credit reports.

To maintain greater control of your credit profile, take these corrective steps before you get crunched by the credit crisis.

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