I’m sure you’ll agree that the number-one benefit to using vendor credit lines is that it provides your business with thousands of dollars in products and services it needs upfront while allowing your business to defer the payments for later.
But what you may not know is vendor credit lines also build a company’s business credit file. This is one of the things I advise my clients to do to show how their business handles its financial responsibilities. When you apply for business financing, a lender will pull your business report to determine its creditworthiness. If your report shows a positive payment history with multiple vendors, you can increase your chances of getting approved for financing.
However, one of the costly mistakes small business owners make is using vendor credit lines without having their positive payment history reported on their business credit files.
Before my clients apply for a credit line with a vendor there are three critical factors we verify:
- High credit
There are more than 500,000 vendors extending credit to businesses, but less than 6,000 of them report to the business credit bureaus. So part of any sound business credit building strategy should include careful selection of vendors that report to the business credit bureaus. This is something you should definitely pay attention to in order to build business credit history. It’s also important to note which business credit bureau a vendor reports to.
In addition you will need to select vendors that not only report to the business credit bureaus but also report on a monthly basis.
This is important because there are vendors that report your payment history only on a quarterly or even yearly basis. Time is of the essence; so if your payment experience isn’t reported for many months, this can drastically impact the speed in which you build a business credit file.
An example of a vendor that reports on a monthly basis is a company like Quill.
Quill sells office supplies, cleaning supplies, packing and shipping supplies, school supplies, printing supplies, and more. Quill offers a net 30 account and reports to Dun & Bradstreet. For small orders you can get approved with a listing on the 411 directories and have a working Web site. New businesses can start out with smaller limits that will increase when they pay on time every month.
Unfortunately there are vendors that report the balance owing as your high credit limit on your business credit file and not the true credit limit your business has been approved for.
For example, one of my friends who started a web design company was recently approved for a $2,000 credit line with a vendor supplying electronic equipment. He purchased $50 of products using his vendor credit line.
His business credit report was showing:
- High Credit ($) 50
- Now Owes ($) 50
The correct reporting by the vendor should have shown:
- High Credit ($) 2,000
- Now Owes ($) 50
Even though his business was approved for a $2,000 credit line there was no way for another lender or business to know this because his file was only showing how much credit was owed.
It’s always best to select vendors that report the true high credit limit that your business has been approved for and not just the balance owing. This factor alone can impact the credit limit recommendation suggested for your business, which is provided by the business credit bureaus in your profile.