Cash Flow Solutions

How to Obtain Trade Credit

What is trade credit?

Trade credit is a type of financing provided by a seller of a product to a business who will resell the product. Studies have shown that approximately 60 percent of small businesses use this form of short-term financing.

What is Trade Credit?

Trade credit has become more prevalent because, in a nutshell, it’s a readily available form of credit that doesn’t require a lengthy application process and a top notch credit report.

However, suppliers typically don’t offer trade credit to new online businesses. Rather, they will begin with c.o.d. (cash on delivery) or paid in advance terms until you’ve proven that you can pay bills on time. Once you’ve established a good track record, it’s much easier to negotiate trade credit with suppliers.

Suppliers will often be more apt to offer trade credit when a business can show a comprehensive financial plan that details out why credit is necessary to support the venture.

How to Obtain Trade Credit

Terms for this form of financing can vary wildly, and the cost of it can be very high. For example, let’s say that a supplier has offered a two percent cash discount if an invoice is paid within 10 days and a net date of 30 days. This means that if you choose to not pay within ten days, you are forfeiting the two percent, and you have 20 more days to use the money. If this is annualized, this money is costing you 36% of the total cost of the products that you’re purchasing. Here are the numbers: (360 (20 days = 18 times per years with no discount; 18 (2 percent = 36 percent discount missed).

Suppliers that offer trade credit typically will tack on late payment penalties if you don’t pay within the agreed upon timeframe. These can add up significantly, too. Often, these fees run between one and two percent per month. This can add up to quite a bit if you can’t pay for an extended period of time!

Trade credit can be a big help for businesses that are in growth mode, but it definitely requires diligence and careful planning to prevent racking up late fees or just losing money by forfeiting cash discounts. While it’s smart to take advantage of trade credit opportunities, it’s also a good idea to evaluate other forms of financing that can work with it or as an alternative.

Alternative Financing Options

Bank loans are one option, but they are not always easy to obtain. The application process can be long and tedious, and if your credit isn’t stellar, it’s not likely you’ll be approved. Small business credit cards can also help bridge a financial gap for some businesses, as well as merchant cash advances and peer-to-peer lending.

Many business owners choose to ask for funds from friends and family, and this can be a low-interest, quick way to get started, especially when you have individuals in your life who are supportive of your venture.

Web-based lenders that offer non-traditional types of funding may also be an option. For example, American Express Business Blueprint™ enables online businesses to apply for a line of credit and get approved in minutes. Money is available 24/7, and there’s no cost for applying. Many online business owners find that a combination of this type of financing along with trade credit can be a particularly flexible, convenient solution for having enough capital on hand to take advantage of vendor deals while keeping enough inventory on hand to fulfill an increasing amount of orders.

Trade credit can be a business owner’s friend, particularly when it’s used in conjunction with other types of financing. By weighing risks, opportunities, and options available, an online business owner can create a powerful financing solution that supports long-term growth.

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