If you plan to take out a loan for your business, buy equipment, open a business credit card—just about anything that requires borrowing money—having business credit is essential. But if you have no credit established in your company’s name, what steps can you take to make your company attractive borrower?
Did you know a long, positive credit history with credit grantors can open the doors to more funding opportunities? Whether you are in the startup phase or an existing business and haven’t established business credit history yet, getting vendor credit is a simple strategy that can enable you to acquire credit and conserve cash flow.
The term vendor describes the entity that is part of the supply chain responsible for making products or services available to businesses. Large retailers typically have vendors from whom they purchase products at wholesale prices and then sell to the end consumer in the retail market.
However, vendors also sell directly to businesses and offer vendor financing opportunities known as vendor credit. Vendor credit is the lending of money by a vendor to one of its business customers so that the business customer can buy products now but defer the payment for a later date.
Here are several benefits of vendor credit:
Conserves cash flow: Cash flow is the lifeblood of a business. By extending the time you must pay your suppliers by 30 or 60 days is what makes this such a powerful credit tool for businesses.
Establish business credit history: As your company begins to pay for invoices it begins establishing its own payment history with that vendor. Each vendor relationship that your company has payment experiences with becomes a trade reference that can be used on future business credit applications.
Low cost financing: Vendor credit is the cheapest form of access to working capital. There are no interest charges attached to the line provided that the invoice is paid within the terms set by the vendor. Not only is this a free form of financing but there are also opportunities for your company to get discounts on orders if paid before a certain period.
Easy to maintain: Managing a company’s finances is a critical role for any business and managing vendor credit does not require much work. Since this is a short-term financing tool there is little to manage making it easily maintainable.
Keep in mind vendors will require that you complete a business credit application and most likely check your company credit report to determine if your company deserves credit. The best way to work towards a line of credit with a vendor if your company does not have established business credit is to become a good-paying customer.
Once you have built a positive track record of orders, contact your vendor to apply for a line of credit. You can avoid financial challenges by getting credit terms from your suppliers. If you are not getting approved for net 30 terms ask for net-20 or net 10-day terms. A vendor who gives your company credit is effectively financing your business at no cost.
Remember, establishing business credit takes time and patience but it’s well worth the effort. Beyond building a creditworthy company, using vendor credit can help you manage cash flow during the difficult first months and years of growing a new business.
Marco Carbajo is a business credit expert, author, speaker and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and AllBusiness.com. His articles and blog, BusinessCreditBlogger.com, have been featured in Fox Small Business, American Express Small Business, Business Week, The Washington Post, The New York Times, The San Francisco Tribune, Alltop and Entrepreneur Connect.