Establishing Vendor Credit

Every business, especially small and medium-sized ones, need to keep an eye on cash flow. You know how it goes: You have to pay vendors when you receive their goods or services, but your customers typically pay 30 days later – if you’re lucky. Products can sit as inventory for a long time, and customers might not pay in a timely way.  This can strain your working capital, leaving you short when you need to make a payroll run, pay your rent, or bring in new products or services to make new sales.

One way to ease this strain on your balance sheet is to open a business line of credit with your vendors, so you can buy goods or services on an account and pay for them on a monthly basis rather than immediately.  A supplier who gives you credit is effectively financing your business – for free.

Of course, there’s a catch. Many small business owners are unable to secure credit from their vendors; they are either too small or simply don’t qualify for it. But what about your business? Check out these tips to setting up a business line of credit.

The best way to get credit is to improve your commercial credit score. It’s simple if you have the cash flow: just pay your invoices on time to establish or improve your company’s commercial credit. But if that’s easier said than done, here are six things you can do to get credit terms and improve your credit quickly and effectively.

  1. Determine your credit rating To find out if your company qualifies for a credit line, check your company’s commercial credit rating with Dun & Bradstreet, the most popular of these services. That’s what your vendor will check if you ask for credit. They’re looking for a high score, the higher the score, the lower the probability of a delinquent payment.
  2. Improve your Credit Score – The best way to get credit is to improve your commercial credit score. It’s simple if you have the cash flow: just pay your invoices on time to establish or improve your company’s commercial credit.
  3. Talk to the mid-sized to larger companies you work with. Typically mid-size to larger companies will report payment information to one or more of the credit bureaus.  Reach out to your vendor’s accounts payable department directly and ask.
  4. Start with smaller amounts of credit. Don’t make the mistake of asking for large amounts and long payment times. Start with a lower balance or shorter terms so they’re more likely to agree and get you started with a line of credit.
  5. Pay discriminately. You need to be strategic about whom you pay and when. We recommend that you:
    • Suppliers who report credit information – Pay early every time
    • Suppliers you are establishing credit with – Pay early when you can
    • Suppliers who don’t report credit – Pay on time
  6. Ask for more. After you have established a history of payment, reach out to your vendors and request better terms.  You can ask for an increase to your credit limit, longer payment time, or both.

Let the borrower beware

In some ways, vendor financing is a step up in the maturity of a business. It brings new privileges, and also new responsibilities, so it’s not something to be entered into lightly. For example, if you’re not using vendor financing and you pay late, the vendor probably wouldn’t enforce a late payment charge. But if you’re using vendor financing and you don’t pay within the agreed terms, this could trigger a penalty.  

Another important example of the potential downside of vendor financing is that if you’re late on paying, it can have a negative effect on your credit rating.  You’re no longer flying under the radar when you’re working with suppliers who report payment performance. Reporting boosts credit scores of prompt payers – and dings the delinquent.

As a business owner, you’re focused on what and how you’re marketing, buying, and selling. But there’s another element that’s vital to your success: the financial management of your business. Stay focused on what you do best – and come to Maxwell for the rest: the specialized financial management skills and expertise that maximize your profitability and business growth. At Maxwell, we’ve got your books.