Business Loans: When Is the Risk Too High for Lenders?

Having worked at the discount store Arlan’s for a decade, both men recognized their industry was changing and they needed to adapt. So, in 1971 they set up a small chain of speciality linen and bath shops in New York called Bed n’ Bath. 

By 1985, Bed n’ Bath stores were in New York, California, New Jersey and Connecticut. But similar stores had opened and Eisenberg and Feinstein recognized they weren’t operating in a niche market anymore. So, they adapted again.

The first Bed n’ Bath superstore opened, a revolutionary space offering every product their competition offered at everyday low prices. Two years later, Eisenberg and Feinstein changed the name of the organization to Bed Bath & Beyond, dominating the retail world with cutting-edge customer service, wholesome product marketing and savvy merchandizing layouts.

Decades of success followed, with a reported $2 billion in sales and 300 stores in 43 states in the year 2000. But even the biggest organizations can’t escape difficulties forever. 

Over the last few years, Bed Bath & Beyond has struggled with financial troubles and mounting debt. Those troubles have piled on a bit too high and pushed Bed Bath & Beyond closer to bankruptcy than it’s ever been.

One of the most telling signs of financial strain for the retail titan is that it had too much debt and didn’t have the cash flow to pay those debts off. Just how much debt? The retailer owes roughly $1.2 billion in unsecured notes and $550 million to lenders including JP Morgan. That’s certainly a case of letting your debt get too high. But the fact that Bed Bath & Beyond has already gone into default on loans (as of January 2023) is a clear sign that it likely didn’t have strong financial management processes and didn’t have measures in place to protect its cash flow.

Even though the company has managed to sidestep bankruptcy by raising $1 billion through preferred stocks and closing all its store locations in Canada, the fact that the retail giant couldn’t get a loan speaks for itself. If they can use that to come out stronger, only time will tell.

The Bed Bath & Beyond story isn’t unique. We’ve seen it happen to other businesses before. And there will be others in the future. It’s a prime example of how much big brands rely on business loans to bail them out and stave off bankruptcy. But it’s also a cautionary tale of how not managing your business finances well from the start and letting your debt get out of control could make your business unappealing and too risky to lenders. 

Before diving into the details of credit risk data and business loans, let’s unpack what creditworthiness looks like. As our State of Credit Risk: 2022 report reveals, mid-market companies appear to be more reliable and creditworthy than large and small businesses.

We know this because these businesses had a higher-than-average credit score of 64, meaning that mid-market companies are in relatively good financial health. We also noticed their average days beyond terms (DBT) scores were the lowest of the three business types at 16. Large companies had a DBT of 19, while small companies had a DBT of 18.

Of course, there are other factors that lenders consider before deciding to dole out millions, or even billions, of dollars in loans. So, if you’re on the hunt for a large loan to help your company stay afloat, you should know that lenders will first look at your business credit report.

Why am I telling you this? Because in so many instances, companies are unaware of their own financial health and don’t check their business credit reports all that often. If you don’t know what your business credit report says and what it will show to lenders, that’s a big problem and something you should rectify immediately. The less you know about your company’s financial strengths and weaknesses, the less likely you are to get approved for a loan – which might be the only thing that could save your struggling company.

But it’s also important to know what data points in your business credit report are most important (at least in the eyes of lenders). If you think it’s just your business credit score and credit limit, that’s barely even skimming the surface. Lenders will look at your payment data, which shows how many of your invoices are past due, how much money is owed (past due), the total number of payments that have been made on-time, your DBT (how many days after the payment terms that you pay invoices) and other relevant information that shows your payment track record.

You should be intimately familiar with all these data points. And you should know exactly where your financial strengths and weaknesses lie – so you can address those weaknesses to make your business more creditworthy in the event that you need a business loan down the line.

A lot of companies would be surprised at how important a company’s payment track record is when it comes to securing loans or getting VC investment. But it really is.

It paints a very specific picture for lenders and investors. When I say payment track record, I’m talking about certain data points that can be easily found in your business credit report, including days beyond terms (DBT), percentage of past due payments and total amount past due. Days beyond terms refers to how many days past the payment terms a company pays its invoices.

If you want to talk about the importance of what a company’s DBT score says to lenders and investors, you don’t have to look much further than VICE Media. Once valued at $5.7 billion, the media company has been battling all sorts of financial problems recently.

Our data shows that VICE Media’s DBT has spun way out of control – at 67. That’s incredibly high. To put this into context, the average DBT for other companies in the same industry is 12. That’s a huge difference. So, I’m somewhat surprised to see that Group Black has submitted a $400 million bid to acquire the company. But then when you look at that offer price in comparison to its once monumental valuation of $5.7 billion, it’s pretty clear VICE Media doesn’t have a lot of options left.

Matthew Debbage, CEO of the Americas and Asia for Creditsafe, shared his thoughts on the VICE Media saga that has been unfolding of late.

“To let their DBT get so high means they have a dismal track record of paying their invoices on time – leaving suppliers waiting upwards of 4 to 6 months for payments that may never come. Unfortunately, our data also shows that 77% of VICE Media’s payments are past due. That’s startling. Usually, we see this being much lower for companies.

I’d expect the high DBT combined with the high amount of past due payments would raise alarm bells to any potential buyers or lenders. If I were on the executive team or board for Group Black, I’d be worried about the state of the company’s cash flow and financial management practices. 

And I’d be even more worried about the amount of outstanding debt Group Black would be inheriting given VICE Media’s outstanding debts and cash flow problems. Taking that on could end up hurting Group Black’s own reputation and even damage its own financial health. I certainly hope Group Black is aware of how bad the financial situation is at VICE Media and what they would be taking on.”

No company wants to be a late payer. It’s never something you intentionally set out to do and it’s certainly not the reputation you want to give to suppliers, partners, stakeholders and the public. But as we know all too well, it’s become quite common.

Circumstances change and you might be waiting on a payment from one of your own customers. But you didn’t anticipate it would take so long for your customer to pay you and you didn’t anticipate the possibility of that income not being available. Now, you’re in a pickle. You don’t have any cash in deposit to cover some of your expenses. So, then you start picking and choosing which suppliers you can pay first and which ones will have to wait for their payments (past the agreed payment terms).

Obviously, that’s not a great situation to put your suppliers in. But more than that, it’s not going to reflect well on your own business. If you fail to pay too many suppliers on time or go into default with some of them, that will negatively affect your company’s creditworthiness. Why? Because the more payments you miss or default on, the higher your days beyond terms (DBT) score becomes. And the higher your DBT score is, the higher your percentage of late payments becomes. And these bits of information all get recorded in your business credit report – there for everyone, including lenders and investors, to see and use as the basis for their decision to approve or reject your loan.

Remember how I talked about VICE Media’s financial situation earlier? Well, let’s just look at how this has worked for them. With a DBT of 67 and a track record of paying 77% of its invoices late, these two data points combined pack a deadly punch and show a dismal picture to lenders, investors or potential buyers. It shows that VICE Media has bigger problems at play internally, which are likely caused by a lack of automation with its accounts receivable and accounts payable processes and not making due diligence enough a priority to prevent itself from getting into working relationships with late paying customers. 

It also indicates the company may not have had the right data available to properly understand all its financial strengths or weaknesses. Whatever it may be, Group Black should pay attention to this data and protect its own reputation and financial health before it gets into bed with VICE Media.

VICE Media isn’t the only big brand suffering the consequences of past due bills, as mattress maker Serta Simmons filed for Chapter 11 bankruptcy in January 2023. A combination of the impending recession and waning customer sales forced Serta Simmons to make the difficult choice. 

Matthew Debbage offers more insight into these external factors. 

“When you think about how the recession has impacted American consumer spending and then you look at the types of products that Serta Simmons sells and the high price points, it’s not hard to see why they filed for bankruptcy. As consumer spending has dropped, mattresses are likely to be one of the last things people will spend their money on. They’re more likely to postpone upgrading their existing mattress and use that money to pay necessary bills for rent/mortgage, utilities, internet/phone and loans.

These factors likely put a strain on Serta Simmons’ cash flow. With less sales coming in and potentially more cash going out (repaying the $200 million loan it received in 2020 as part of a refinancing agreement to stay afloat during the pandemic), the mattress manufacturer didn’t have much choice but to file for bankruptcy.”

But Matthew remains optimistic about Serta being able to deliver on loan repayments. “Our credit risk data shows that the company is slowly but surely rebuilding its financial health. While its average DBT fluctuated between 7 and 11 days over the course of 2022, it was much lower than the average DBT (between 9 and 11 days) in the furniture and home furnishings industry for most of the year. This could be seen as a positive sign by its lenders (old and new) that Serta Simmons will be able to repay its loans in a timely manner.”

Another huge risk factor that will make lenders wary of lending you money is if your company is embroiled in all sorts of legal troubles – from lawsuits to court judgements to tax liens to Uniform Commercial Codes (UCCs) being filed against you. Again, all this information is recorded in your business credit report so don’t think you can just not mention it to potential lenders or investors. They can still find that out pretty quickly and easily.

Need proof? Look at the story of cosmetics giant Revlon Inc to see what I mean. Our data shows it had a total of 15 UCC filings between 2018 and 2021, meaning lenders had to seize property to recoup their losses because Revlon defaulted on loans. 

If that wasn’t bad enough, Revlon tried to secure a $1.4 billion loan through a US judge to get through bankruptcy, even though they were $3.5 billion in debt. Lenders had good reason to criticize the judge’s decision to let Revlon proceed with the loan, given that the cosmetics giant has an average DBT of 20, while the average DBT for other businesses in the industry is 13.

On top of being bad for your reputation, legal filings could end up one of the biggest drains on your cash flow. As our State of Credit Risk: 2022 report found, legal filings cost American businesses over $54 billion in 2022. That’s no small amount. Now if you’re a company with an excessively high DBT and over 75% of your payments are past due, legal problems are just going to add fuel to the fire. As a lender or investor, the combination of all these risks combined could make you far too risky and push them to reject your loan application or walk away from a potential buyout deal. 

Now that you’ve seen what lenders look for on your business credit report, the takeaway is simple – You need to be financially responsible and have a full view and understanding of your credit risk if you want to increase your chances of being approved for a loan or to be seen as a valuable investment by potential buyers. While this certainly won’t happen overnight, there’s plenty you can do to get the ball rolling.

• Protect your business against potential legal problems by hiring the right compliance, financial and accounting specialists. Develop in-depth credit risk policies to prevent you from getting into bed with the wrong customers who don’t pay their invoices on time and don’t have a strong cash flow.

• Run regular credit checks on your existing customers (weekly is ideal) so that you’re aware of their ability to pay their invoices on time. Circumstances change and they may have lost some business, which leads to a drop in income and makes it harder for them to pay you on time. Know the risk level of every one of your customers, always. And know if and when it changes – because it definitely will.

• Create an efficient debt collection process through automating late payment reminders, digital ledger technology, self-service portals and charging late fees for overdue invoices.

• Don’t assume every prospect will be a worthwhile customer. That’s not always the case. Do your due diligence and run a credit check on them to see how strong their cash flow is, if they have too many legal filings that could be draining the business and how quickly they typically pay their invoices. If that data shows you they aren’t reliable and owe a lot of money in past due payments, it may be better to walk away from the deal.

• Review your credit policies to find gaps in cash flow management, identify your best and worst paying clients, streamline internal processes and to get your sales and finance teams on the same page. 

• Build contingency plans for when the economy shifts and factor them into your annual budgets.