How to Get Credit from Suppliers

Most established companies get credit terms from their suppliers. This credit enables companies to buy goods or services while paying the supplier on net-30 to net-60 terms. Clients usually demand payment terms from their suppliers because it improves their cash flow. They get to use the supplier’s services or products for a few weeks before they have to pay for them. Unfortunately, few small businesses get supplier credit. This situation puts them at a competitive disadvantage.

This article teaches you the steps your small business needs to follow to get payment terms from suppliers. We cover:

  1. The problem for small businesses
  2. Who deserves net-30 terms?
  3. How to get supplier credit
  4. What to do if you need supplier credit now

1. The problem for small businesses

Many small business owners can’t get payment terms from their suppliers. Most small businesses don’t have a trade credit profile. Consequently, they have to pay their suppliers at delivery or, worse, in advance. This requirement for early payment puts small companies at a financial disadvantage against larger competitors.

However, the situation is usually worse. Your clients still demand net-30- to net-60- day terms from your company. You must pay your suppliers quickly, but your clients pay you slowly. This scenario often leads to cash flow problems. Of course, you could avoid many of these financial problems by getting credit terms from your suppliers.

2. Who deserves net-30 terms?

Let’s examine this situation from your supplier’s point of view. Suppliers are willing to let clients become net-30 accounts only when they know the client will pay on time. Your suppliers determine creditworthiness by reviewing your company’s profile through one of the trade credit bureaus. These include Dun and Bradstreet, Experian, and Ansonia.

The easiest way to increase your chances of getting net-30 terms is to improve your commercial credit profile. This article shows you how to do just that. This process is simple but requires discipline. It’s worth the effort, though. If you succeed, your company gains a competitive financial advantage. Remember, a supplier who gives you credit is effectively financing your business – for free.

3. How to get supplier credit

The best way to improve or build your company’s commercial credit is to become a good-paying client. It’s as simple as that. However, a specific method of doing this improves your credit quickly and effectively. The method has four steps:

a) Step #1: Work with suppliers who report credit

Some suppliers report client payment trends to the bureaus, while others don’t. This distinction is essential. When possible, work with suppliers who report their payment experiences to one or all credit bureaus. There is no easy way of telling which companies report information and which don’t. Your best bet is to ask their accounts payable department directly. Generally, midsize and larger companies report payment information.

b) Step #2: Ask for a small amount of credit

Many small businesses make the mistake of asking for net-30 terms immediately and giving up when the supplier says no. If the vendor is unwilling to provide net-30 terms, ask if they can provide net-5 or net-10 terms. A small, short-term supplier credit line is enough to get this process started.

If your vendors don’t agree to give you credit terms, ask if they would be willing to reconsider this request in the future. Most will say yes. You can still use this process if suppliers are unwilling to give you credit initially.

c) Step #3: Pay a little early – consistently

The trick to building and improving supplier credit is managing vendor payments carefully. Follow these rules:

  • If the supplier reports credit information, pay early every time
  • If the supplier does not report credit, but you want terms from them, pay early when you can
  • If the supplier does not report credit, pay them on time

These rules help you build a credit profile with the credit bureaus by always paying those clients who report information quickly. They also help you maintain (or improve) credit with your other vendors by paying on time or slightly earlier based on your requirements. However, never pay any vendor late. Late payments disrupt the process and damage your supplier credit and reputation.

Step #4: Ask for an increase and repeat

Once you have built a good track record of early payments (e.g., 3 to 6 months), call your suppliers to negotiate better payment terms. Try to get a longer payment time, a larger credit limit, or both.

If you were not getting terms, ask for them. If you had net-10 terms, negotiate for net-20 or net-30 terms. Then, go back to step #3 and consistently pay them a little early. Repeat this process until you reach the maximum credit that the supplier is willing to offer.

4. What if you need supplier credit now?

Building credit and getting payment terms from suppliers can take several months or years. This delay presents difficulties if you currently have cash flow problems and need working capital. Cash flow problems can occur if your company is growing or gets a very large order. There is no easy solution, but you can usually bridge the need by using financing.

The most common cash flow problem occurs because you have to pay suppliers immediately, while your clients pay you in 30 to 60 days. Small businesses rely on their cash reserves to handle these payments. Unfortunately, few small businesses have adequate reserves to manage this problem effectively. One solution is to bridge this cash flow gap by using invoice factoring.

a) How does factoring work?

Invoice factoring allows you to finance your accounts receivable. A factoring company can advance funds against your invoices that are due in 30 to 60 days. This transaction provides funds to pay suppliers and fulfill new orders.

Most factoring transactions are not structured as loans. Instead, the factoring company purchases your accounts receivable and provides an immediate advance. Transactions settle once your end-customer pays their invoice on their usual terms. Lines can be used by small businesses whose principal asset is a roster of solid commercial customers who don’t have major issues. To learn more, read “What is Factoring?

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