If you're looking for a way to finance your first inventory so you can launch your business, or you're looking for a way to improve cash flow in your growing business, trade credit may be the answer. This common source of financing for small businesses occurs when a supplier allows you to delay payment for 30 or 60 days after you've received goods or raw materials.
In essence, the trade credit is like a short-term loan. Many small businesses that wouldn't qualify for traditional bank loans tap into trade credit instead because it's readily available, eliminates or reduces down payments, improves cash flow, can eliminate interest charges, and payments can be spread over months, or even years.
Common forms of trade credit include:
- Financing inventory — ideally, you sell the inventory before you need to pay for it.
- Buying on consignment — you only pay the supplier if the goods are sold. Unsold goods are returned to the supplier.
- Equipment loans — you can use the equipment to produce products and sell them before having to pay for the equipment.
Action Steps
The best contacts and resources to help you get it done
Share your financial plan
If you're a startup, you can improve your odds of securing trade credit by presenting your financial plan to your supplier. With a strong financial plan that shows how you'll be able to make payments on trade credit, you may be able to convince a supplier to give you a chance.
I recommend: Develop a solid
financial plan with PlanMagic Finance Pro software.
Credit applications
If you're a new customer, a supplier may ask you to fill out a credit application and provide credit or financial references prior to agreeing to offer trade credit. If you're an established customer, you can usually negotiate trade credit deals based on your past payment history.
I recommend: Download a
sample trade credit application at AllBusiness.com.
Personal guarantees
Many suppliers will hold you personally responsible for trade credit if you're a new customer or a startup.
I recommend: Business Credit Services offers a business credit builder program designed to improve your ability to obtain trade credit without a personal guarantee.
Strengthen your cash flow
Suppliers will look closely at your cash flow projections and history when making a decision about whether or not to offer trade credit. Accurate cash flow projections and records are a must.
I recommend: Download Excel templates for cash flow forecasting at
ExcelBusinessTools.com.
Understand the costs
By taking advantage of trade credit, you may be forfeiting discounts for quick payments. Many suppliers offer a 2 percent discount for payment within 10 days and no discount for payment within 30 days or within 60 days. Choosing the net 30 option translates into a 36 percent annual interest rate. On the other hand, a net 60 option translates into a borrowing rate of slightly over 15 percent.
I recommend: Find a formula for figuring out the cost of trade credit at
Business Owner's Toolkit.
Keep your books balanced
Using trade credit to purchase goods or supplies creates an account payable. To keep your accounting ledgers balanced, include any trade credit in your accounts payable ledger.
I recommend: Purchase accounting ledgers from
OfficeWorld.com or input trade credit as an account payable in an accounting software program, such as
PeachTree or
QuickBooks.
Tips & Tactics
Helpful advice for making the most of this Guide
- When negotiating trade credit terms, consider your expected income in relation to the duration of the pay period and the amounts of each payment.
- Making your payments on time is the best way to ensure that your suppliers will continue offering you trade credit.
- Communicate with your suppliers. If you're having difficulty making payments, contact your supplier immediately to discuss the situation and find a solution. This will make them more likely to continue offering you trade credit.
- If you negotiate trade credits, devise a plan to use the additional working capital to boost your revenue.
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