One of the most undervalued credit opportunities a small business owner can leverage is the trade credit he or she has with their suppliers and vendors. Not only is this a powerful way for a new business to build a strong credit profile, it can also be a great way for small businesses to leverage credit to build their businesses while other sources of capital have dried up as a result of the health and economic crisis we find ourselves in the middle of right now.
Granted, it’s not the same thing as going into the bank and getting a $100,000 small business loan, but it is a way to leverage small amounts of borrowed capital every month to fuel business initiatives. What’s more, it’s one of the more powerful ways to increase the depth of your business credit report so that when more capital becomes available in the future, you’ll be able to demonstrate your creditworthiness to a lender who will make that $100,000 small business loan.
How Do I Establish Trade Credit Relationships?
While it’s true that some industries are more likely to offer trade credit than others, that doesn’t mean there aren’t a lot of potential vendors or suppliers willing to offer payment terms to your business. Talk to your suppliers to see if they offer credit terms to their customers. It’s likely many of the companies you do business with offer 30- or 60-day terms to their good customers and all you need to do is ask.
If your regular suppliers don’t, there are still opportunities. You may also be able to establish trade accounts in the businesses where you purchase common supplies every business uses like Staples, Home Depot, or Lowes. They will report your good credit history to the appropriate business credit bureaus, which is a critical part of leveraging trade credit to build a strong business credit profile.
How Does Trade Credit Strengthen My Credit Profile?
If you want to use trade credit to strengthen your credit profile, you’ll want to make sure the suppliers you do business with report your good credit history to the appropriate business credit bureaus. If they don’t, you may be building a good credit history with an individual supplier, but it’s not doing anything to help your overall credit profile. It’s important enough that you should ask any vendor you use if they report and request that they do if they currently don’t.
Building these relationships with your suppliers tells the business credit bureaus that you are more likely to be a good borrower. Because the credit bureaus value the age of your credit accounts, you’ll want to start building these trade credit relationships sooner rather than later.
Post COVID-19 it might be tempting to simply use your personal credit cards or other personal credit to make up for the lack of available business credit, but the larger balances associated with business expenses could increase the percentage of personal credit you use on a regular basis and may even hurt your personal credit score. Ultimately handicapping your ability to access borrowed capital down the road when you really need it.
Trade accounts are a good, and fairly safe, way to both establish business credit and strengthen a weaker business credit profile.
What Makes Trade Credit Important Post COVID-19?
This is particularly important now because many of the small business loan options that were available just a few months ago are not going to be available. The hard truth is that options like business credit cards, while still available, are only going to be available to new applicants with better credit profiles. If you currently have a business line of credit you will likely see your credit limit reduced and new lines of credit will probably dry up—at least though the rest of the year. Many small business lenders are tightening their credit criteria and some are even stepping back from making small business loans altogether, so trade credit will be one of the few affordable financing options available to small business owners over the next several months and into next year.
When most people think of business credit, they don’t really consider the importance of the credit relationships they have with their suppliers—but the credit bureaus and their creditors do.
This article was originally written on May 20, 2020.