Would your life be different with a 700+ credit score?” That’s the enticement on one Web site offering credit-challenged consumers the opportunity to “piggyback” on someone else’s excellent credit card record. For a price–as much as $4,000—someone could spend two or three months listed on a high-limit, promptly-paid card (without charge privileges, of course) and have his or her credit score inflate by as much as 200 points. 

Most takers of this service have been subprime mortgage applicants, who, in addition to getting an undeserved score, could count on loan officers so anxious to write as much paper as possible that they’d look the other way. 

How many business credit applicants avail themselves of the piggybacking option isn’t clear. It’s certainly far less common than in consumer credit. But for trade creditors who rely heavily on personal guarantees, it is a concern.  

T-Mobile, which distributes cell phones and cell phone related products to independent retailers nationwide, requires personal guarantees from more than 90 percent of its dealer base. Former Credit Manager Jim McCoskey says that one of the most effective checks on applicants, beyond credit scores, is proof of ownership of real property. 

“In the absence of mortgages on their personal credit report, you should find out if they own unencumbered real property not under mortgage,” he says. “If so, you should get a recent property tax statement that shows the guarantor’s name, the location and the appraised value.”  

McCoskey also warns about real property listed by the guarantor that is actually in someone else’s name–and therefore judgment proof. 

Randy Clark, assistant division credit manager at Young Electric Sign Company, also requires a lot of personal guarantees. Most of these applicants are new in business and need a sign for their establishments. The company has a standing policy that a personal guarantee or some other kind of security is required for any business less than two years old. 

“We first look at what other company or companies have inquired about this consumer lately,” Clark says. “If it’s not a regular type of credit, like a bank, a credit card company, an auto or home lender, then I might be suspicious that the account has been ‘cleaned up.’ 

“Sometimes you just have to go with your gut feeling about whether a report is believable,” he sums up. “You may have to actually talk with applicants to get that warm and fuzzy feeling about them.”  

McCoskey says that fraud isn’t nearly the problem at the front end of the credit process as it is at the back end with sales and activations. Since retailers’ commissions are based on activations (when a customer actually signs up for cell service and buys a phone), some retailers falling short of sales targets will falsify activations by making up names and addresses and phoning the cellular carrier to “activate” the subscriptions. 

But customers who would do that would certainly not hesitate to avail themselves of a piggybacking opportunity at the front end of the credit process. So as piggybacking becomes better known, it may well become more of a problem in trade credit.

4. Case Study:  Large Order to a Slow Pay 

You receive an especially large order, over $50,000. Your customer is a distributor. Your credit investigation shows that they are very slow pay and there are some collections. The product you make is unique to you and, in fact, you have your own name brand for the product. You do not want to lose this order, as the sales department anticipates a lot of business from them. You view this potential customer as a mid-level risk. What should you do? 

The Strategies 

Prepay is out of the question; they will balk. Besides, they want terms. An irrevocable stand-by letter of credit could work, but that would only cover this order, and you do not want to jump through hoops each time they want to place an order. You want to develop a relationship with them. A personal guaranty is about as worthless as the paper it is written on, so what can you do?  

Offer them open terms with a secured position by way of a Purchase Money Security Agreement (PMSA). Take a first position on your name-brand products and accessories for existing and after-acquired inventory, including the proceeds of the sale of your inventory. Another option is to obtain an irrevocable stand-by letter of credit, for one-year. You can split the fees (about ½ to 1 percent of the value).