While cash is king among small business owners, vendor credit lines — commonly known as “trade credit” — can be an alternative solution to fund short-term needs. Trade credit is the largest use of capital from business-to-business and remains the number-one alternative to personal and small business loans. The Small Business Administration even reports that vendor credit is the single largest source of small business lending in the United States today.
So What Is Vendor Credit?
Vendor credit is when a company, like an office equipment supplier, allows your business to purchase products and pay for them at a later date. Typically the terms are net 15, net 30, net 60, net 90, or even net 120. These vendor credit lines work like a charge card, meaning that the balance must be paid in full on or prior to the due date.
The primary benefit to using vendor credit lines is that it will provide your business with thousands of dollars in products and services it needs upfront while allowing your business to defer the payments. You conserve cash flow for more critical short-term expenditures while the flexible payment terms give your business plenty of time to pay the invoice.
A secondary benefit is that vendors report your positive payment history to the business credit bureaus. The more vendors you establish credit lines and a payment experience with, the stronger your business credit profile. This alone can positively impact the size of the credit limit recommendation for your business, which is determined by the business credit bureaus and publicly disclosed information on your business credit file.
However, one of the biggest mistakes made by small business owners is assuming that every vendor reports their payment history to the business credit bureaus. Currently there are more than 500,000 vendors that extend lines of credit to businesses but fewer than 6,000 report your payment experience to the business credit bureaus.
So if building your business credit file is a priority for you, be sure to select vendors that report. You can verify this by inquiring with a vendor that you plan to apply with. Be sure to ask what business credit agency they report to and how often they report.
One of my favorite aspects to vendor credit lines is the minimal qualifications required for approval. In many cases an application only requires your business contact information, federal tax ID number, a DUNS number from Dun & Bradstreet, and an authorized name and signature. You don’t need your social security number or personal guarantee.
The specific vendors requesting only this information will pull a business credit report to base their approval, which makes getting vendor credit lines much easier and more convenient compared to credit cards or loans. A prime example of one of these types of vendors is a company called Quill. Quill sells office supplies, cleaning supplies, packing and shipping supplies, school supplies, printing supplies, and more. From filing and storage to handheld computers, Quill has a wide range of discounted top name brand products.
Quill offers a net 30 account and reports to Dun & Bradstreet. Best of all they report your payment history every 30 days. For small orders you can obtain approval if your business has a listing on the 411 directories and a working Web site. If you’re a new business, you can start out with smaller limits that will increase when you pay on time every month.
As you can see, vendor credit lines can be an ideal source to fund short-term needs and at the same time provide your business a way to build a strong business credit file while avoiding the use of your personal credit and guarantee.