Supplier credit: Why you want it and how to get it
Many companies struggling with working capital and cash flow challenges are overlooking an ideal source of financing that’s right beneath their nose: supplier credit.
Supplier credit is the payment terms offered by vendors and suppliers to their customers. For example, instead of requiring customers to pay upon delivery of products or services—or in other words, cash on demand (or COD)—a supplier might permit the customer to pay within 30 days. This is commonly known as net-30 payment terms.
Taking full advantage of supplier credit can have a big impact on a company’s working capital and cash flow cycle. This impact can be so drastic that, in some instances, supplier credit can eliminate a company’s need for outside financing altogether.
Perhaps best of all, supplier credit is truly a cost-free form of financing: Vendors typically do not charge interest unless payment is made later than the agreed-up terms. Typically, no collateral or personal guarantees are required. Having strong supplier credit is like having a “non-equity” partner in your business who understands that if you succeed, they will succeed.
As a source of working capital, supplier credit can be vital during the early start-up stages of a business. However, it can be difficult to obtain supplier credit for companies that haven’t been in business very long. But if you know how to build, maintain and grow your business credit rating, you can significantly reduce that time.
Establishing a Solid Credit Rating
According to Fred Seymour, the Director of Business Credit Development for Creditdms, a consultancy that helps business owners restore and build their personal credit, the first step is to establish a solid credit rating with the national credit bureaus. “This starts with using vendors that report to the credit bureaus, which will enable you to establish a credit history over time—typically, up to a year or longer,” Seymour explains. Some of these vendors may require a strong personal FICO score and possibly a personal guarantee before granting credit, he notes.
It may be difficult to navigate through the various vendor requirements for establishing credit. “A consultancy or business credit development firm can provide assistance and help accelerate the process, often reducing the time required to just 4-6 months,” says Seymour. “The more prepared you are to apply for supplier credit and the cleaner your presentation, the better your chances not only of getting approved, but getting approved for higher credit limits.”