Ever felt like money is going out faster in your business than it is coming in? You’re most definitely not alone.
Managing cash flow is at the top of the list when it comes to small business financial concerns. Research from the JPMorgan Chase Institute found that the average small business only has cash to last 27 days without additional cash inflows. And an NFIB survey reported that 53 percent of small businesses use financing to maintain cash flow.
If cash flow is tight, there’s a simple question you may be able to use to tip the scales in your favor. All you need to do is ask your vendors and suppliers one question: “Do you offer terms?”
Understanding Trade Credit
When a company offers a customer terms, it allows that customer to pay for goods or services at a later date. For example, net-30 terms allow you to pay the bill 30 days after the invoice date, while net-60 terms allow you to pay in 60 days. Some suppliers will even extend longer payment terms such as net-90 or net-120 terms.
In fact, this kind of financing, often referred to as “trade credit,” is the most common type of financing used by businesses. For suppliers and vendors, it can help increase sales; for businesses that take advantage of trade credit, cash management can improve considerably.
When Nav co-founder and CEO Levi King was running his first business, a sign manufacturing firm in rural Idaho, negotiating terms with suppliers literally helped him keep his business afloat. Once he proved he was dependable by paying his suppliers on time and establishing a positive business credit history, he was able to negotiate terms as long as net-90 with vendors that included steel and plastic suppliers, among others.
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Instead of relying on lenders that would have charged him interest and perhaps had inflexible payment terms, he says, “My suppliers became my lenders, and most importantly, I received valuable (and occasionally invaluable) goods and services the moment I needed them.” Sometimes that literally meant he was able to free up cash to make payroll on time.
Here’s what to know before you seek terms from your vendors or suppliers:
- Paying later for a product or service you’re receiving is a form of credit, so there may be a credit check involved. Some companies will check the owner’s personal credit scores, some will check business credit scores, and some may check both. Longer terms are usually extended to those with strong credit.
- A personal guarantee may be required; read the terms of the agreement to find out.
The good news is that accounts with terms are often (though not always) reported to commercial credit agencies. That means you may be able to build your business credit this way.
Mix and Match
There may be times when you don’t want to go this route. For example, let’s say your vendor offers you the option of either terms or a discount for paying in full immediately. In some cases, the discount may be the better option. You could then use a credit card with a grace period to make the purchase, pay the lower price, and still have roughly 30 days to pay the bill. You get the same effect as net-30 terms but retain the benefit of the discount.
Sometimes you can mix different types of financing. For example, you can accept net-30 terms and then pay off the invoice using your credit card or line of credit. Combining net-30 terms with a credit that offers a one-month grace period essentially gives you about two months interest-free (give or take a few days), and that can be a huge benefit when funds are tight.