Using Trade Credit to Finance Your Business Start-up or Expansion
When you think about getting financing for a business start-up or for expansion, you usually think of going to a bank. But a bank may not be the best way to begin setting up your business. Instead, consider a different approach-use trade credit, also known as vendor financing, to provide much of your funding.
Establishing Trade Credit
When you have set up the structure for your new business, start dealing with local suppliers for equipment, supplies, and inventory. In other words, obtain credit directly from suppliers, like office supply stores, specialty equipment suppliers for your business type, and inventory or materials. Ask each vendor if they will allow you to pay "on account" and then be sure you pay off the account each month. For larger national vendors, request one of their credit cards, and pay it off each month.
Why Establish Trade Credit
Using trade credit does four things for your new business:
- First, it helps you buy the things you need without having to go to a bank and use personal funds as collateral.
- Second, and more important, it gives you a business credit rating to use when you need to go to a bank for a loan.
- Third, it allows you to establish business credit so you have a better chance of getting a bank loan.
- Fourth, you can reserve the bank financing for capital improvements that will generate more returns.
It takes work to talk to many vendors and suppliers and to establish credit with each, but it pays off in the end, as you see your business credit rating improve and your ability to borrow money from a bank increase.
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