Trade Credit or Vendor Financing for Business Growth

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If your business needs a loan, and getting one from a traditional lender isn't a possibility, consider vendor financing, sometimes called trade credit. This article explains how this type of credit works. 

Vendor Financing and Trade Credit

Vendor financing is a common practice for businesses. Vendors are companies you do business with. Vendors can be:

  • Service providers, such as a payroll service or cleaning service
  • Suppliers, such as an office supply store or specialty supply house
  • Equipment manufacturers
  • A company that supplies parts or materials.

Trade credit is the same as vendor financing. It's the process of buying equipment and supplies from suppliers or vendors and letting them finance your purchases. In other words, trade credit or vendor financing is “buy now, pay later.”

Some suppliers call this an "open account," because they keep your account open and you can buy from them on credit as long as you continue to pay regularly. Trade credit might be used for or expansion or for normal business activities. 

For example, you could go to an office supply business and set up an account and buy your office furniture, computer, and office supplies from this company. The vendor would require you to fill out a credit application and use the vendor's own credit card or financing company to check your credit and offer you financing terms.

Using Trade Credit to Finance Your Business Start-up or Expansion

When you think about getting financing for business startup or for expansion, or for inventory financing, you usually think of going to a bank. But a bank may not be the best way to begin setting up your business. Trade credit can also be used to buy inventory for your startup. In this case, you might have to use a personal credit report, since your new business would not have a credit history. 

Establishing Trade Credit

When you have set up the structure for your new business, start dealing with local suppliers for equipment, supplies, and inventory. In other words, obtain credit directly from suppliers, like office supply stores, specialty equipment suppliers for your business type, and inventory or materials. Ask each vendor if they will allow you to pay "on account" and then be sure you pay off the account each month. For larger national vendors, request one of their credit cards, and pay it off each month.

How Trade Credit Terms Work 

Using trade credit can get your better terms on business-to-business purchases. Shari Waters, Retailing Expert, explains that businesses give favorable financing terms to good customers. She says: 

Once it is established that a business can pay its bills on time, it is possible to negotiate trade credit and terms with suppliers.

These favorable trade credit terms might include discounts for paying a balance due early. 

How Trade Credit Helps Your Business

Using trade credit does four things for your business:

  1. It helps you buy the things you need without having to go to a bank and use personal funds as collateral.
  2. It gives you a business credit rating to use when you need to go to a bank for a loan.
  3. It allows you to reserve the bank financing for capital improvements that will generate more returns.

It takes work to talk to many vendors and suppliers and to establish credit with each, but it pays off in the end, as you see your business credit rating improve and your ability to borrow money from a bank increase.

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