Leveraging Trade Credit to Build a Strong Business Credit Profile

By Ty Kiisel

Accessing capital is a challenge for every small business, but particularly so for early-stage businesses. If you’ve been in business less than a year or two, finding a lender willing to give you a small business loan can be difficult—but there are things you can start doing today that will not only help you access capital now, but will also help you in the future.

"It’s not likely you’ll be able to go into the bank and get $100,000 for working capital,” says Peter Bolin, Experian Director of Consulting and Analytics, in a recent interview offering advice to early-stage businesses. “Start by establishing trade credit with your vendors. Make sure they report to the credit bureaus, like Experian, and make sure you make your payments on time."

By doing so, Bolin explains, "This will dramatically increase the depth of your credit report so when you do need that $100,000 from the bank or other lender, you’ll be likely to get approved"

Bolin also suggests that business owners establish a strong business credit profiles. "Consider it an investment in the future of your business," he says.

Establishing credit, or payment terms with your suppliers might not be the same thing as a term loan, but vendors willing to give you 30-day or 60-day terms to pay for inventory are giving you credit that can be a valuable tool to finance inventory purchases. Some industries will even provide longer terms for inventory purchases in the form of what they call “flooring”—the way many auto dealers and similar businesses finance their inventory purchases from the manufacturers.

The good news for small business owners is that this type of credit is relatively easy for young companies to get. In some cases, establishing payment terms with a vendor is as simple as asking for them. What’s more, instead of paying interest, some vendors even offer prompt payment discounts for customers who pay early.

For example, if you pay an invoice that is due in 30 days in 10 days it’s not uncommon for a vendor to offer a discount. However, if you pay the invoice late, it’s more than likely you’ll be charged a late fee.

Seek Opportunities to Build Credit

It’s true, there are some industries that might be more likely to offer trade credit than others, but that doesn’t mean there aren’t opportunities for your business. For example, a new contractor purchasing supplies will likely be asked at the checkout counter if he or she would like to establish a trade account, and establishing credit at places where you might already be regularly purchasing supplies, like Staples, Home Depot or OfficeMax, is a great way to start. These stores report your credit history to the bureaus, which is an important part of leveraging trade credit and also helps you build a strong business credit profile.

Whether or not a vendor reports to the credit bureaus is an important consideration of choosing which one to work with. If a vendor is not reporting, you might be building a good credit history with that particular vendor, but that's not helping you build your credit profile. In fact, it’s important enough that you should ask; try to work with vendors and suppliers that do report. This is particularly true for young businesses that haven’t established a good credit profile yet.

Bolin says, “New businesses might equal lower scores [because their credit history is short], but the average small business owner is creating 1-1/2 trade credit relationships each year and using smaller loans to build their credit profiles over the first few years, ultimately indicating to us that many of these businesses are great borrowers.”

The credit bureaus also consider the age of your credit accounts when reporting your business credit—and the longer the better. With that in mind, it’s important to start building those relationships sooner, rather than later.

While it might be tempting to use personal credit cards or avoid using credit altogether in the early years, that could handicap your ability to access borrowed capital down the road when you might really need it. Trade accounts are a good, and relatively safe, way to start establishing business credit in the first year or two of doing business.

When most people think of business credit, they don’t really consider the importance of the credit relationships they have with their vendors or other suppliers—but they should. Not only does it provide credit today, it will also help them down the road.