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Why Is Trade Credit So Important To Business Credit?

Wednesday, October 31, 2012  
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By: J Corey Pierce

No matter what, your business is it is likely you need supplies. For some companies it may only be a matter of office supplies and equipment, for others it might be an entire product line brought in for re-sale. No matter what type of business you are going to be dealing with vendors. Because of this you are in the perfect position to build your business credit in a way that will benefit your company in several ways.

Even if you can afford to buy your paperclips with cashdon't. Right from the start you should be contacting vendors that you will be doing business with and enquiring about the possibility of trade credit. Use your business name, address, and pertinent information to obtain vendor accounts so that it is your business that builds credit not your personal credit history.

Make all of your purchases on trade credit accounts whenever possible. Not only will this build up a great deal of positive credit history for your company, it also helps you keep your finances in order with excellent records of all of your expenses. That's a plus at tax time too, and it also keeps you from blending your personal money with business funds.

Why Trade Credit is Important to Your Business' Financial Future?

Unless you want to be supporting your company out of your own pocket for the rest of its business life making sure your business has operating funds all its own is important. It will also make a huge difference when you need extended operating capital, expansion loans, equipment loans, or any other type of financial backing. Of course if your personal credit is excellent you might be able to back a loan with thatbut do you want to bet your family's home on it?

Many small business owners do just that. In some cases it can work out okay, but anyone who has been in business for any length of time can tell you it doesn't take much for it to become a disaster. Even if personally backing a business loan does work out with a hitch, or disaster, is tying up your family's financial situation for years a good idea? What about when you want to buy a new house, car, or pay for college tuition? How bad will you feel when you have to tell them that you can't because your equity funds are tied up in backing a business loan?

With proper business credit your company can get the financial backing it needs without your help. Where your help comes in is in the intelligent planning and building of trade credit right from the start.

Because the economy has caused financial industries to re-think how they evaluate lending fewer lenders are willing to take a chance and risk a loan to a business of any size if it isn't stable and doesn't show fiscal responsibility. Your well-established trade credit history proves how well your company handles its financial obligations.

Avoiding Complications

Establishing business credit through trade credit is even more important if you have a partner or take on investors. Obtaining loans gets tricky when you are backing a company that you are not a sole owner of. Obtaining venture capital with no history of good financial stability is more difficult than if you have exemplary business credit as well.

These are all things you may not think of if you are sitting in your basement starting up a shoe-string business, but Ted Turner started in his basement and Google was the brain-child of a couple of college studentsthings grow. If you want to grow with your business start it off right.

Start Off Easier

Trade credit, otherwise known as vendor credit has also helped finance more small business start ups than lending institutions. No money for the things you need to get your business operating at full capacity? Get trade credit and pay as you go like you would a start-up loan. True start-up loans are much harder to aquire now with the economy being the way it is, but vendors need business just like you do and are more willing to extend varying amounts of credit to get you to buy their product.

Even if you are only able to obtain a small amount of credit take advantage of it as a way to get started and build credit. Make your monthly payments faithfully and apply for more credit. Some vendors will happily increase your limits when they see a reasonable payment history without even being asked.

Major Advantages of Trade Credit vs. Bank Loans

In some cases trade credit is even better than a bank loan. Repayment amounts are often lower than a bank loan, there is no down-payment and interest is often less than a bank loan. For those reasons it makes better sense to use trade credit for operating supplies and products than it does to use other forms of loans.

What to Look for in Trade Credit

Look for vendors who report to the major business credit agencies. The big three business credit institutions are slightly different than the big three personal credit agencies. Business credit reporting agencies are: Dun and Bradstreet, Experian Smart Business and Equifax's Small Business Financial Exchange.

Make sure vendors report all activity: both good and bad. You want to build positive credit including information on when you pay on time, early, and more than the minimum.

Find out what the limits are on your account. You need to use credit to make it count, but you shouldn't max out your accounts either. Just like in personal credit overcharging to the point you are at your limits only looks like poor management and financial skills.

Find out if they offer discounts. These can be very beneficial to you if you have the money to pay for items. Use your vendor account to purchase the item and then pay for it within the specified amount of time and get discounts for early payment. Many vendors offer deals like 20% discount on purchases paid within 10 days. This can end up being a sizeable amount on big ticket items like computers, office furniture, or product for re-sale.

Consignment vs. Credit

When seeking out vendors for products some offer an alternative to credit called consignment. In these cases products are supplied for you to sell and then you pay the cost of each item sold. One of the cons to consignments is that the cost is usually higher than items purchased outright. The bigger drawback to consignment purchases is that you do not develop any credit history. The biggest advantage to consignment purchases is that there is no interest charged and if you do not sell an item you return it in the original condition without penalty or cost.

Using consignment for products to sell is a viable option if you do not have income to start with but should be avoided if you can afford to make minimum monthly payments while proceeds start to come in. The key goal is to get started affordably while at the same time building credit for a bright future. Corey Pierce is CEO of BusinessFinance.com that since 1995, has been one of the internet's largest resources for business owners in search of business loans. BusinessFinance.com has developed an online business funding system that matches a businesses owner's need for capital to the requirements of over 4,000 business lenders. 

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