Is Your Small Biz Owed Cash?

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COLUMBIA, Md. (TheStreet) -- Every business owner knows that success requires more than just making the sale. It requires getting paid. These days, that payment is increasingly past due.

Customers were delinquent by 6.6 days, on average, in the third quarter, up from 6 days a year earlier, according to the Credit Research Foundation in Columbia, Md. The food and lumber industries had the best luck in collecting payments quickly, with an average delinquency rate of 1.8 days. Business service providers had an average rate of 19.8 days.

Even when customers paid on time, businesses had to wait 42 days after they sent invoices to recoup their fees.

Late payments have become especially problematic after the downfall of lender CIT Group (Stock Quote: CITGQ), which has made it harder to secure loans. Payment delays and lack of funding can be deadly to small businesses, at least the ones that rely on a constant source of income to maintain day-to-day operations and create new products.

More companies are buying credit insurance policies that guarantee a large percentage of customers' account balances if they are more than 90 days past due.

Since the beginning of 2008, "we have seen an increasing demand in credit insurance by four times, especially by companies who have never been insured before," says Kerstin Braun, executive vice president of Coface North America, a division of Natixis. "The buyers are just weakened during the credit crisis."

Unfortunately, increased demand has forced the companies to limit the number of accounts they're willing to insure. At times during the past two years, Coface has paid more in claims than it was receiving in premiums. This has led the company to reduce coverage on weak buyers. In some cases, it means not covering certain buyers at all.

"Our credit insurance company Coface has reduced the limit of what they'll insure," says Collin Tuthill, president of Royal Food Import in Boston, a small business that sells canned food to large businesses. Royal Food generally won't sell to a buyer they haven't insured, unless the customer is willing to pay in advance. When the company can't insure risky potential customers, it must refuse to sell to them, resulting in lost business.

"The whole industry is really restricting coverage," says Lyle Wallis, vice president of research at the Credit Research Foundation. Coface's competitors in the credit insurance space include American International Group, Atradius, and Euler Hermes.

In the meantime, many small businesses are turning to reliable large customers and business partners as sources of credit, in addition to revenue. In fact, the amount of business credit is now 1.5 times larger than commercial bank loans, according to the Credit Research Foundation.

"Your larger businesses that have access to available bank lines are drawing down on those lines, extending credit to smaller businesses," Wallis says. "The larger businesses are almost having to act as banks."

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