Giving Good Credit Its Due

Douglas Lopez grew up in West Long Beach, in a family of contractors. After majoring in communications at the University of Colorado, Lopez worked as a home builder for many years. He began selling construction products in 1989 and in 1995 opened a company that distributes residential windows to contractors, architects and designers. This year he launched an e-commerce subsidiary, which he says is the first U.S.-based, business-to-business window dealer on the Internet. He spoke with freelance writer Karen E. Klein about how he learned to make his company’s cash flow support its 60% annual growth.

Most small businesses eventually hit the wall financially. To grow they either have to borrow money, use personal credit cards or take on a partner. Everything may be fine while the economy is going well, but a hiccup in the cash flow can be potentially devastating, especially when you are starting out and your personal assets are on the line.

My goal early on was to get my personal assets off the hook and establish the company’s good credit quickly.

One way to do this is to open credit lines with your vendors. When you first start out, they will want you to purchase from them on a cash-on-demand basis. So for three to six months, you’ll have to pay them with cashier’s checks when your products are delivered. But after that, it is time to get a credit line with terms from each vendor. By having terms with them, you can grow your business using someone else’s money.

Call and ask them for an account with terms, which means that you will have 30, 60, or 90 days to pay for your supplies. The most common scenario is a net-30 term, which means you must pay for one month’s purchases by the 30th of the next month. Make sure you pay on time.

After you have done that for six months and have established that your company is responsible, call your vendors and ask for a “plus or minus net 10” discount. This means you will pay your invoices by the 10th of the next month, plus or minus one day. Your vendors will give you a discount for doing that because cash flow is just as important to them as it is to your company.

The discount I shoot for in my industry is 2%, but if your vendors will only give you 1%, take it and come back to them in four or five months and ask for 2% again. Some companies will give you a discount of up to 5% for paying early.

If your vendors won’t give you a discount, go to their competitors and negotiate a discount with them. After a few months of paying early, you will have other vendors breaking down your door trying to get your business.

You have to stay on top of your billing and bill your clients quicker in order to pay your vendors early, but it pays off in the long run. If you have $30,000 in business with one vendor each month, you’ll be making $600 a month just paying your bills. You’ll have $7,200 at the end of the year, which might significantly defer your rent. That 2% could mean the difference between staying in business and going out of business.

Another way to establish good credit for your company is to take out a business loan or a line of credit. Though most banks will not give small-business loans to start-ups, once you’ve been in business for a year you should be a candidate for a bank loan or a line of credit.

Having this backup can help tremendously when your company is crunched for cash. If you’ve established a good credit history for your company, it may take less than a week to get loan approval. I would shoot for $10,000 minimum, to start. Interest rates will range from 10% to 19%, depending on how much you’re borrowing and the liability associated with your industry. Set up your line of credit early and don’t abuse it.

An alternative to going to a bank is approaching a government business development agency, some of which offer low-interest loans for working capital because they want to encourage businesses to stay in their city. The Long Beach Business Development Agency offers interest rates for local businesses as low as 7%. It can be reached at (562) 570-3800.

As your credit lines grow, you can take on more business. I make sure I can pay back my line of credit by not abusing or overusing it and by making a habit of collecting early from my customers, who pay up front when they place their orders.

After two years of paying your bills on time, you will find companies searching you out and offering favorable terms because they want your business. I registered my company with Dun & Bradstreet and called them to report my earnings, because many vendors check with them on your credit ratings, your product history and your gross income. Having a D&B; account number serves as a way for businesses to check on you and the legitimacy of your company.

* If your business can provide a lesson to other entrepreneurs, contact Karen E. Klein at the Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016 or at kklein6349@aol.com. Include your name, address and telephone number.

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AT A GLANCE

* Company: 1stwindows.com, e-commerce site for Cali-fornia Distribution Center Inc.

* Owners: Douglas Lopez and Microscape Web Solutions Inc.

* Nature of business: Online and traditional wholesaler of residential windows

* Location: 1858 E. 20th St., Signal Hill 90806

* Year founded: 1995

* Employees: 4

* Web site: https://www.1stwindows.com

* Annual revenue: $600,000