Tips on Building Business or Trade Credit

Buy Inventory Now, Pay Later With Open Accounts

Two women shopping.
Jordan Siemens/The Image Bank/Getty Images

One of the best tools for delaying cash outflow of any cash-strapped or new retail business is the trade credit available from suppliers. Trade credit is one part of the process to build business credit. It is an open account with a vendor who lets a retailer buy now and pay later.

Many suppliers may require the first order to be paid by credit card or C.O.D. (cash/check on delivery) until the business has been deemed creditworthy. Once it is established that a business can pay its bills on time, it is possible to negotiate trade credit and terms with suppliers.

Types of Trade Terms

Two of the most common types of trade credit terms are the Net 30 and Net 10 accounts. These net terms specify payment is expected to be made in full 30(net 30) or 10(net 10) days after the goods are delivered to the retailer.

Some vendors offer cash discounts and the retailer may notice the notation "1/10, Net 30" on their invoice. This refers to a 1% discount to the retailer if payment is received within 10 days of the delivery of goods, and full payment is expected within 30 days.

If an invoice is $5000 and "1/10 Net 30" is noted, the retailer can take a 1% discount ($5000 x .01 = $50) and make a payment of $4950 within 10 days.

Credit Application

New customers to a supplier may need to fill out a credit application and provide some other financial information about the business. Other items found on a credit application could include:

  • Company name, address, contact information
  • Business structure: corporate, partnership, sole proprietor, etc.
  • Terms requested
  • Sales tax Number
  • Tax EIN
  • DUNS Number
  • Years in business
  • Annual revenue
  • Bank information
  • Credit card number
  • Trade references of other suppliers
  • Signature of an authorized officer

For existing customers of the supplier, the credit decision is generally based on past payment history. This is why it is so important to maintain a prompt and dependable payment relationship with all vendors.

It Can't Hurt To Ask

Fledgling businesses may want to introduce themselves and their business directly to either the business owner or the credit department manager of the supplier they would like to do business with. Offer to show the decision maker your business plan and explain that you need your first order on credit in order to launch your retail business. The vendor may have terms available to new businesses.

The idea behind trade credit is to have your goods shipped to your retail business, and sell them before you have to pay for them. There are other ways to finance your inventory, but most include having to pay interest on a loan. This is why trade credit is key to reducing the amount of working capital needed.

Cost of Trade Credit

As a retailer, you should always be on the lookout for suppliers who offer not only the lowest prices but fast, dependable delivery. Try not to become too committed to one vendor because they offer credit terms to your business. Trade credit is best used as a short-term solution for managing cash flow and shouldn't be used long-term.

If using trade credit for an extended period, plan to avoid unnecessary costs through forfeiture of cash discounts or delinquency penalties. Late payment penalties can run between 1 to 2% on a monthly basis. This means that missing the net payment date for an entire year can cost as much as 12 to 24 percent in penalty interest.

Trade credit creates additional cash resources by delaying cash outflows that would otherwise occur at the time of purchase. For this reason, taking full advantage of trade credit for purchasing inventory is an important step in managing payables and improving cash flow.