Supplier credit: Why you want it and how to get it
Once you’ve established initial supplier credit, your goal should be to grow and expand your credit. The best way to do this is to make prompt payments on your credit accounts. Suppliers offering credit do not want to hear excuses for late payments—honesty is the best policy, and timely payment is the key. The truth is, most suppliers want to increase your credit, because this may result in increased sales for them—so don’t let them down.
Getting More Aggressive
The next step is to become more aggressive with your supplier credit. One way to do this is to ask your suppliers if they offer discounts for early payment. This is kind of the opposite of negotiating longer payment terms, but in the right circumstances, it can save your company substantial money.
For example, many vendors offer what’s known as a “2/10, net 30” discount. This means that if an invoice is paid in 10 days instead of 30, you’ll receive a 2% discount on the payment. Depending on the size of the invoice and your cash flow cycle, it might make sense to take advantage of the discount.
Becoming known as a customer who pays early may earn you more than just discounts— it may also earn you respect and the opportunity to take advantage of special deals and favors. For example, you could ask your supplier to hold inventory for you, or to help you out with a trade show or assist with marketing. And when you call, you can be pretty sure the supplier will take your phone call, which can be very important.
Also, by being more aggressive with supplier credit, you might also be able to increase the size of your orders, which could allow you to save money via volume discounts and on shipping costs.
Earn It—And Then Guard It
Supplier credit is a critical financing tool for almost every business. The most important thing to remember about supplier credit is that it must be earned—and once earned, it must be guarded carefully.
If ignored or abused, supplier credit can vanish instantly, potentially leaving a business with a severe cash flow challenge. But if handled wisely and responsibly, supplier credit can be one of the most valuable financing tools available to any business.
Tom Klausen is the president of First Vancouver Financial Services, Ltd., and a consultant in the small business field. He works with small business owners, lenders, consultants and accountants throughout the U.S. and Canada. Klausen has been involved in the alternative lending field for more 27 years, participating in hundreds of successful fundings, and has written and published numerous articles on the topic of alternative finance. Reach him at TKlausen@fvf.ca or (604) 988-1490 (in Canada) or (206) 947-0912 (in the U.S.).