(Client: Credit Management Association)

When the economy started its downward slide, Debra Parcheta, chief executive officer of software-development firm Blue Marble Enterprises, immediately saw the effects in the form of slower receivables.

“At that time, customers didn’t care about our 30-day terms. They started stretching their payments out to 60 or 70 days,” she says. “But my fixed expenses didn’t go away. I still had to pay my employees, payroll taxes, and everything else.”

Fortunately the company had secured a $100,000 bank line of credit before the slowdown hit. “We tapped our line for about $30,000 to help get us through this period and paid it back within a year,” she says.

Parcheta’s story illustrates the importance of building and maintaining strong business credit. At some point, most growing companies will need to access credit. Whether it’s to plug short-term cash-flow gaps (as in Parcheta’s case) or to finance expansion, new equipment, or more employees, few companies have the resources to grow on their own without some kind of cash infusion.

“Small-business borrowers have traditionally relied on credit cards and home equity lines of credit to finance growth,” says John Barrickman, the president of New Horizons Financial Group, a financial consulting firm. “However, these avenues are now closed for many small firms.”

Unfortunately many business owners make the mistake of not thinking about how to prepare their companies for the day they’ll need to borrow money — until the day they need to borrow money. “It’s always better to engage a lender sooner rather than later,” says Phil Wambles, a senior vice president and senior credit officer with Regions Financial. “The earlier you bring your banker into the process, the more flexibility he or she will have to help meet your needs.”

Of course, the current credit environment doesn’t make things any easier. Since the onset of the financial crisis, most banks have tightened their lending standards considerably, making it hard for even some well-established businesses to obtain loans. This makes it critical to begin planning now for the day when you may need to borrow money for your business — whether it’s three months or three years from now.

Barrickman says companies should do everything they can to position themselves as an attractive financial risk to banks and other lenders.

Specifically, banks are looking carefully at the traditional “five Cs of credit”: character, capacity, collateral, capital, and market conditions. “Business owners should look carefully at their companies to see how they’re doing in each of these areas before talking to a bank or lender about getting a loan,” says Barrickman.

In today’s environment, capacity is especially important, he adds. “There’s no substitute for strong cash flow. Lenders will look for patterns to help them see what is driving cash flow and how stable a borrower’s cash flow might be.”

“Cash is king,” says Parcheta. “I don’t think of myself as being in the software business, I’m in the cash flow business. We manage the company to our cash flow. When it comes to business purchases, if I don’t have the money in the bank, I’m probably not going to buy it.”

Hector Jimenez, a vice president with G&M Mattress & Foam Corp., which is a member of the Credit Management Association, says his company has implemented three strategies to boost credit.

First, we’re paying all of our bills on time so we remain as attractive a customer as possible for banks. Second, we’re doing as good a job as we can in collecting from our customers who buy from us on trade credit. And third, we’re only buying on credit now if we absolutely have to. We’re also sticking closer to our credit agreements with customers so that when business does pick up we’ll be able to purchase what we need without a problem.”

To qualify for a loan, Wambles says a business should meet three basic criteria: “It should have good credit, manageable debt, and solid cash flow.”

To keep her company’s credit rating high, Parcheta tries to use the credit she has wisely, paying off corporate credit cards every month and paying down her credit line in a timely manner. “We use our credit responsibly,” she says. “I know other businesses that got into debt and thought they could work their way out of it by growing sales, but this is a tough environment in which to get new customers.”

Wambles says now is the time to give your company a once-over and make sure it looks presentable to lenders. “Dust off your business plan and make sure it’s adjusted to reflect the realities of your business today and what you expect tomorrow. Also have updated financials and cash flow statements at the ready and be prepared to discuss how the loan amount you’re requesting will be used and how it fits into your overall plan.”

The good news is that, despite the credit crunch, there are still lenders out there who want to loan money to financially sound businesses with strong management and track records. “Banks are absolutely still in the lending business,” says Wambles. “Funds are still available for qualified borrowers — the key word being qualified.”

Also remember that in today’s credit environment, communication with your banker is more important than ever. Bankers don’t like surprises; so let your lender know about everything that’s going on with your business. “Being proactive when sharing news, whether good or bad, with your banker builds the banker’s confidence that you truly understand your business and are doing a good job of monitoring its financial performance,” says Barrickman.

“Whether the news is good or bad, both parties are impacted,” says Wambles. “Ultimately, it’s in the best interest of all involved that the business prospers.”

Don Sadler is a freelance writer specializing in business and finance. Reach him at don@donsadlerwriter.com.