Trade Credit: What It Is and How to Use It

Trade Credit

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Used properly, trade credit can help you run your small business, avoid cash flow problems, and build a strong business credit profile. As a result, it can even help you qualify for more business financing in the future.

You can make purchases you need to without depleting cash because you do not have to make immediate payments. Better yet, you can do so without exhausting a credit card or line of credit.

But, what is trade credit, and how do you get it? More importantly, how do you use it to effectively build business credit? Here are the answers to some of the most common questions people ask about trade credit.

What is Trade Credit?

Trade credit is credit between a buyer and supplier rather than buyers and financial institutions. You may also hear this type of business finance tool referred to as business tradelines or vendor credit. It is financing that allows you to buy stuff from vendors without paying cash for invoices immediately. 

Instead, they allow you to pay them at a later date.

Trade credit terms are generally net terms on invoices. This is different from the revolving credit terms you might get on financing from a financial institution. 

With net financing terms, you have to pay the whole balance by a certain date. Whereas, with revolving credit terms, you can pay a partial amount of the total balance each month.

For example, with trade finance, the vendor will bill you for the goods or services you buy from them with the understanding that you will pay within a certain amount of time. 

Most often, it is 30 days or net-30 terms. Occasionally trade credit terms on invoices will extend net-60 or net-90 terms.

There are a number of ways net 30 accounts can help you run your business more efficiently. 

For example, a contractor can use trade credit to purchase the supplies they need to complete a contract with minimal initial cash outlay. Then they can pay for the supplies as the contract is paid.

What is a Trade Credit Example?

There are other examples of how trade credit can help your business. For instance, you can use it to take advantage of bulk pricing on inventory and supplies. Suppose one of your suppliers offers a 10% discount if you buy 100 widgets instead of 50.

Even if you do not have the cash on hand currently to buy 100, you can use your credit line with the vendor to buy the items at the lower cost. Net payment terms allow you to save cash reserves to use as working capital.

Using these payment terms, you can increase your bottom line without raising prices. There is no worry about having the cash to pay the invoice immediately. You just pay when the term is up.

Why Do Businesses Offer Trade Credit to Customers?

The answer to this one is simple. Offering trade credit to a buyer is a way to get more business. By allowing customers to buy with net payment terms, they give buyers the opportunity to purchase more at one time than they would be able to otherwise.

This creates loyalty from their customers. If a buyer can get the same thing at a cheaper price with one vendor, but that vendor will not extend credit, many customers are more likely to stick with the vendor that will give them the credit.

The reason for this is that credit lines allow for more flexibility in money management.

Trade Credit vs Business Credit Cards

Both trade credit and credit cards have a place in a well-rounded business credit portfolio. They both help businesses manage funds, especially cash flow, better. There are some notable differences however.

Vendor tradelines are less flexible. They are issued by a business to specific customers who they deem creditworthy. It can only be used with a specific vendor, and they are usually net accounts.

The entire balance must be paid off at the end of the agreed-upon term. That also means there is no interest. However, some will offer an early payment discount if you pay before the net term.

Credit cards are generally more flexible. You may be able to use them anywhere. They will have revolving terms, meaning that you can make a partial payment.

However, there will be an interest charge if the balance is not paid in full. That is, unless you have a 0% introductory interest rate for a time.

These two types of credit can be used in tandem to help you better manage your business.

Use the vendor credit where you can. Then, you will have your revolving term credit cards free to handle what you cannot with trade credit.

How Trade Credit Can Help Build Your Business Credit

Your corporate credit is separate from your personal credit. It is also quite different. For one, you have to be intentional about building it. 

That means you need accounts reporting positive payment history to your corporate credit report. Some vendors that extend trade credit will do that.

Tradelines on your business credit report can also improve your PAYDEX score with Dun & Bradstreet. Having a PAYDEX score is important because D&B is the largest and most commonly used corporate credit reporting agency.

When you add tradelines to your company’s credit report and handle them responsibly, you are only helping your corporate credit score grow.

The right tradelines break the “you have to have credit to get credit” cycle. You have to find those that do not take credit into account for approval. 

There are some that will look at other things to determine creditworthiness. For example, time in business, business revenue, and business bank account balance will all be under consideration.

How to Get Tradelines for Business Credit

This is a tricky one because not all trade credit can help your business credit. There are two steps to ensuring you have these types of accounts that will help you build a strong credit score for your business. First, you have to be sure your business is set up to be Fundable™.

This starts with a Fundable™ Foundation. To build a foundation that will help you qualify for trade credit, you need to incorporate and get an EIN, among other things.

The goal is to separate the business from the owners. Before trade credit can help build business credit, it has to be in the business’s name, not the owner’s. This foundation helps establish separation between the two.

Then you have to find vendors that will report your positive payment history to the credit reporting agencies. 

If you don’t already have established credit for your business, you will need to find those that will not check your current credit score when making an approval decision. These are called starter vendors.

How Do I Get Trade Credit For My Business?

When you are looking for trade credit, you need to pay attention to a few things. First, there is no need to try to get accounts with suppliers who do not have anything you need. 

Then, it’s helpful to find companies that will report positive payment history, not just a missed or late payment. Where do you start?

Step 1: Start With Your Current Suppliers

Start by asking companies you already have a relationship with about trade credit. Some are more willing to offer trade lines to current customers. This is because they see them like less of a credit risk.

If they agree, ask if they will report payment history to your business credit report. They don’t have to, but some will if you ask.

Step 2: Fill Out the Application

It is important to use your company name, contact information, and EIN. Do not use your personal contact information or your Social Security Number. The only reason you may need to use your Social Security Number is for identification purposes to prevent fraud.

Step 3: Wait for an Answer

For some companies, this process is virtually automatic for their customers. With others, it takes some time.

Those that look at credit scores only can be pretty fast. If they want to see time in business or need to verify revenue or business bank account information, it can take longer.

Step 4: If Approved, Verify Terms and Use Credit Responsibly

If you get approval make sure you understand the terms. If you have a long-standing relationship with the vendor, or you already have strong credit, you may be able to negotiate a higher limit or longer net terms if you need them.

Then, use the credit, but use it responsibly. Responsible credit management is the key to small business success.

Remember, even one late payment can make a difference when it comes to business credit. There is no 30 day grace period like you might have with personal credit.

Trade Credit Can Be an Important Part of Managing Cash and Running a Thriving Small Business

Trade credit with vendors can help a small business manage cash flow and run in the most efficient and effective way possible. 

As a bonus, some vendors will extend credit to businesses that do not have a credit score and they will report positive payment history to the corporate credit bureaus.

As a result, soon you’ll be able to get credit cards with better terms. A strong business credit score will also make it easier to get business loans. It all starts with trade credit.

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