🎉 Tillful is now part of Nav! Learn about business tradelines at Nav
Startups and small businesses that launch from scratch can use financing options to prop up their liquidity (the fancy way to say “cash availability”). One type of financing is trade credit, where vendors set invoice payment terms that allows buyers to buy now and pay later.
Here’s the rundown on what trade credit is, how to get it, and how to leverage it for the benefit of your business.
What is trade credit? The basics, explained
Trade credit is a form of financing between business suppliers and buyers. It basically acts as an interest-free loan for businesses that buy wholesale products, manufacturing materials, and other goods. Trade credit is most commonly used in the business-to-business (B2B) sector.
Trade credit loan terms tend to be shorter than a long-term loan agreement (for example, the standard trade credit term is typically around 30–90 days).
Trade credit has two key benefits.
- It’s a way for businesses to get financing when they may be unable to secure funding from traditional lenders. This is especially true for small businesses or startups with thin business credit history.
- When a supplier reports the trade to the major business credit bureaus, it can positively impact a buyer’s credit profile. Be aware that the reverse is also true: if a business fails to repay the costs on time, the trade can also negatively impact a borrower’s business credit.
Trade credit terms to get you started:
|Net 30||A trade credit term where suppliers require payment within 30 days of an invoice date|
|Net 60||A trade credit term where suppliers require payment within 60 days of an invoice date|
|Net 90||A trade credit term where suppliers require payment within 90 days of an invoice date|
|Bad debt||An unpaid invoice or loan that a buyer cannot or will not repay (creditors can write bad debt off on their business taxes as an unpaid loan)|
|Trade working capital||The difference between your current assets and liabilities, specifically those essential to your everyday operations|
Most businesses rely on trade credit.
Did you know? Up to 90% of world trade relies on trade finance (including trade credit, insurance, and guarantees) according to the World Trade Organization (WTO).
And a reported 60% of small businesses use trade credit agreements—which is helpful, because small businesses with limited assets tend to have a harder time securing capital than bigger companies.
What does this prove? Well, it shows us just how helpful trade credit is for local businesses, global startups, and anyone looking for an upper hand in a competitive market.
Opportunities and risks of using trade credit
If you haven’t realized it by this point, trade credit has a lot of perks…
But it’s important to look at the full picture before taking on any financing option, whether it be a small business loan from a financial institution or trade credit from a supplier.
Let’s compare the pros and cons of using trade credit as a small business:
|Opportunities in trade credit||Risks of using trade credit|
Did you know? Trade credit is good for vendors, too. Suppliers can offer trade credit to build their clientele and increase customer loyalty. On the flip side, vendors risk gaps in cash flow or losing out on the money entirely if buyers pay late or not at all.
How to get trade credit & leverage it
Here’s how to get trade credit.
Depending on your business, you’ll need to find vendors that supply the goods you’re looking for. Look for vendors that extend trade credit to qualified buyers. Store accounts, which often come with credit cards, can be a good place to start. Business credit groups on Facebook also often have great, crowdsourced suggestions.
Leverage your network to speak with vendors directly or fill out a trade credit application. While each vendor may have its own version of a trade credit application, you can generally expect it will ask you for:
- Business details
- Financial statements
- Tax information
- Trade references (aka tradelines)
After you submit your application, suppliers may run a credit check and speak with your references. Businesses and vendors then negotiate terms of the deal.
Pro tip: When preparing to negotiate with business creditors, the U.S. Chamber of Commerce advises businesses to create financial projections and profitability statements, illustrate any circumstantial impact of the current state of the market or economy, and lay out competitor differentiators (for example, newly diversified revenue streams).
Why? This can help you increase your credit limit, extend the terms to have the invoice due at a later date, offer discounts for new customers or immediate payment, or any other payment terms that fit.
Make the most of your trade credit.
Unfortunately, not all commercial credit transactions are reported to the major business credit bureaus. However, you can ask vendors to report credit transactions during the negotiation phase of the agreement. By having vendors report on-time payments, you can start building a robust business credit profile that makes future financing easier.
Last word on trade credit
Trade credit can uplift your business if you use it right.
Stephanie Sims, founder of Finance-Ability, says, “If you know that you can't make payments in a timely fashion, reach out to your vendor sooner rather than later.” Building relationships with vendors is crucial to the long-term success of your business, and communicating is always a good way to maintain that trust.
Trade credit may just be a type of credit, but it’s a powerful one at that. It can enhance—or weigh down—business credit reports. It can be an affordable, interest-free line of credit with early payment discounts—or a pricey one with late payment penalties galore.
Ultimately, trade credit is a net-positive for small and new businesses who are ready to build their payment history.