Pros and Cons When Obtaining Credit Terms With Suppliers
How to determine if vendor credit lines provide leverage for your company
When running a business, it is always advisable to have a good rapport with both your customers as well as your suppliers. This is because, at the end of the day, you need both of them when running your business. As an entrepreneur who is destined for greatness, you must always know that running a successful venture requires sources from outside. This is because there comes a time in business whereby as a business person, you need help from outside. The most reliable people that you can run to when you have challenges in your business can either be suppliers or your customers.
If you can try to have a good relationship with your suppliers, then you can be sure that you could get a constant supply of goods without having to make an upfront payment.
The business that can strike a deal with vendors to be supplied with goods without having to make upfront payment is referred to as trade credit. However, before any entrepreneur goes ahead and accepts trade credit from any vendor, it would be very crucial for them to know the good and the bad side of trade credit as a form of payment.
Many upcoming entrepreneurs are running to trade credit as a form of payment without having prior knowledge of what it entails. So today, we would like to give you deep insights of both the pros and cons when obtaining credit terms with suppliers. Here is a quick highlight of the pros of trade credit to buyers.
1. Guaranteed Supply of Goods
As a business person, having a constant supply of goods from specific vendors while at the same time making regular sales to clients can be the best time ever. However, sometimes it is difficult to have things flowing smoothly between you, the supplier and your buyers. Most of the times, the supply of goods can be difficult especially when the vendors need upfront cash payment before supplying the goods to the business. However, any business owner who has a vendor that trust him will have no trouble even if the cash inflow of the business has declined since the vendor may agree to give out goods with the promises that the payment for the goods will be made at a later date.
This is one huge advantage that any entrepreneur can get from vendors that offer trade credit. If you have a business that has a business agreement with vendors to supply you with goods whose payment can be made later then this enables you to conserve cash flow. This ensures that you have a constant supply of goods even when your finances are not stable. You will be able to sell the goods supplied, enjoy the profit and then repay the vendor during the agreed period.
2. Industry Insights
One of the major merits of having a reliable vendor who supplies you with goods is the fact that you get updated about the changes or developments that the business supply line you engage in has undergone or undergoes at any time. This is one good thing that any entrepreneur would like to have because other than money and good relationships with both your customers and vendors, information regarding your supply line is also key. Any vendor who has supplied you with goods will obviously keep in contact with you due to money owed by the business.
In the course of reminding you about the amount you are supposed to pay, the vendor will obviously share with you about the latest advancements in the business. For example, the latest quality of goods that have emerged and how you can prepare yourself for them in the near future. Isn’t this a good thing for anyone who wants to succeed in business? Definitely, it is!
3. It May Increase Your Credit Worthiness
Establishing a good partnership with a vendor or a specific number of vendors has many advantages and increasing your creditworthiness is one of them. How? Many suppliers in the entrepreneurial world do stay in touch with each other and by doing so, there comes a time when they share about the whereabouts of the businesses they supply goods to. This means that in case your supplier runs out of goods that you are demanding, they may go ahead and connect you with another supplier who has the goods that you want at that time.
This shall actually open ways for your business to have a constant supply of goods from different vendors without necessarily paying cash on delivery of the goods.
This, however, comes at a cost! You have to show your creditworthy business and that you are reliable. What does this mean? You have to honor all your agreements by paying the right amount within the agreed time period. When you do this, you will never struggle when it comes to purchasing of goods for resell, even if your business has been hit by a financial crisis. Trade credit from vendors will be there for you at any time. Thus, trade credit can increase your business’ creditworthiness since it opens ways for you to deal with different vendors.
4. Cash Retention
For any business to develop, an owner has to find unique and simple ways of retaining cash into the business. Without having such techniques, your business may always be cash-strapped or going through financial difficulties due to excess cash outflow from the business. One of the best ways you and retain cash in your business is by getting trade credit from vendors. This will actually allow you to get goods from the vendors, sell them and later pay for the goods from the vendor. In other words, you will not be using your own money to do business but rather selling the goods on behalf of the supplier and enjoying the profit.
This will actually enable you to retain a lot of cash in your business that can be used for other business development.
5. Enjoying Trade Discounts
In order for any given entrepreneur to enjoy running a business, they have to make sure that the costs of running the business are minimized. If not so, it might be very difficult for the business owner to enjoy the good things within the business world. You can actually minimize the costs of running your business by engaging in trade credit from your vendors. Once a supplier gives you goods on credit, there is a percentage discount that you enjoy depending on how immediate you make the payment.
The earlier you make the payment, the higher the percentage discount that you get. The discount given shall actually minimize the costs of the supply and hence enable you to make a huge amount of profits when the goods are sold.
Cons of Trade Credit to Buyers
Although there are many pros of trade credit that any business owner can enjoy, there is the other side of the coin that you should also look at before you decide to be offered trade credit by any vendor. As stated earlier, getting credit from suppliers also comes with certain disadvantages which you should beware of. Here is a quick breakdown of the cons of trade credit to buyers.
1. High Costs
Once you agree with a certain vendor to supply you with goods, you must be ready to pay for penalties in case you fail to pay for the goods in 30 days. Most of the times, the penalty is calculated as a percentage and thus the later you repay, the higher the penalty or rather the interest rate and hence the higher the costs of goods since the costs of the goods will be higher. This means that if you want to keep the costs of running your business at the lowest point, you have to make the payment for the goods in the first 10 day period or within the 30 day period.
Later than that, you are at risk of raising the costs of the goods which will automatically translate to high costs of running your business. Therefore, trade credit is only favorable to buyers who make early payment for the goods i.e in the 10 day period. It is, therefore, good for you to weigh different options before resulting in using trade credit since it can at times raise the costs of running your business.
2. Effect on Your Credit Rating
This is a very key thing that you should have in your mind before you engage yourself in trade credit. This is due to the fact that trade credit may end up hurting your business credit rating in case you keep on making very late payments to the suppliers. Some suppliers might report your unbecoming payment behavior to different credit bureaus and this will actually make your business credit unworthy. If the late payments that you make are reported to the bureaus, the business credit score of your business may actually become very low.
This will make your business so credit unworthy and thus you may never get any institution to give you a loan whenever you are in financial difficulties.
This means that if you want to deal with trade credit from suppliers, be very keen on whom you partner with. It would be advisable to work with a supplier who never bothers to give reports to the credit bureaus in case of late payment of the supplied goods. Secondly, engage in trade credit when you know that you will be able to honor all the terms and conditions given by the supplier. Those are the best ways in which you can avoid lowering your business credit rating.
3. Cash Flow Difficulties
Some businesses do well during different seasons and at the same time decline at certain times. This means that if you engage in trade credit, the supplier or the vendor does not care whether your business is booming or recessing; all they want is for you to make payments on time. Trade credit is very sweet when the business is booming but at the same times the worst during a recession. This is because when the business is booming, there are ready amounts of cash that comes into the business which you can then use to pay for the goods.
Unfortunately, when the business is in a recession, paying for the goods can actually be a hard nut to crack simply because the goods are not moving as expected and yet the supplier is insisting on payment. This can actually force the business owner to use business credit cards or go for a business loan from another source so as to pay the vendor for the goods supplied.
This can be the start of a financial crisis to any business. It is never advisable in business to go for a loan so as to offset another loan. This is the worst thing that trade credit can make you do. This means that before you engage yourself in trade credit, be sure you will be able to pay the vendors during both boom and recession periods of your business.
4. Loss of Suppliers
When dealing with vendors who offer trade credit, it is good to have in mind the fact that they also have financial obligations to make at the end of the day. This means that if you do not make your payments on time, you may end up inconveniencing the plans of the vendors. What does this mean? Making late payments for the goods supplied might hurt the vendor in one way or another. If you continue with the trend of making very late payments, then definitely no supplier shall want to work with you in the future unless it is cash on a delivery basis and not trade credit.
Many vendors also need timely payments so as for them to keep running their businesses smoothly and if you do not honor the terms and conditions, then you are at risk of losing loyal suppliers.
In conclusion, trade credit from suppliers has both the pros and cons and therefore it is advisable for any business to understand them before engaging in this business method.