Most established companies get payment terms from suppliers. This arrangement means they can buy goods or services while paying for them on net-30 terms. Clients usually demand terms from 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, many small business owners can’t get credit from their suppliers. They are too small or simply don’t qualify for it. Instead, they have to pay when they receive an invoice, or worse, pay in advance. This requirement puts them at a financial disadvantage with their competitors.
Your clients still demand net-30 terms
However, the situation is usually worse. Your clients still demand net-30 to net-60 day terms from your company. You need to pay your suppliers quickly, but your own clients pay you slowly. This scenario often leads to cash flow problems. Of course, you can avoid many of these financial problems by getting credit terms from your suppliers.
Who deserves net-30 terms?
Suppliers can use a number of tools to determine if your company deserves credit. However, the most common way to to check the commercial credit of your company is to use a credit report. These reports provide comprehensive credit information, are inexpensive, and are easy to use. Vendors can purchase them from companies like Dun and Bradstreet, Experian, or Ansonia.
Obviously, the best way to get credit is to improve your commercial credit report. This article shows you how to do just that. This process is simple but requires determination. 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.
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, there is a specific way of doing this that improves your credit quickly and effectively. The process has four steps:
Step #1: Work with suppliers who report credit
Some suppliers report credit information to the bureaus, while others don’t. This distinction is important. When possible, work with suppliers who report their payment experiences to one or all of the 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.
Step #2: Ask for a little credit
Many small businesses make the mistake of asking for net-30 terms immediately and giving up when the supplier says no. If the supplier is unwilling to provide net-30 terms, ask if they can provide net-5 or net-10 terms. A little credit 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 from the start.
By the way, many small business owners make the mistake of demanding credit and getting upset if they don’t get it. This strategy never works, it looks unprofessional, and it often backfires. Instead, ask the accounts payable representative politely. This approach goes a long way in helping get your credit established.
Step #3: Pay a little early – consistently
The trick to building commercial credit is managing supplier payments carefully. Follow these rules:
- If the supplier reports credit information, pay early every time (this is key!)
- 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 quickly those clients who report information. 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 late. Late payments disrupt the process and damage your supplier credit.
Step #4: Ask for an increase and repeat
Once you have built a good track record of early payment (e.g., 3 to 6 months), call your suppliers to negotiate better 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. You get the gist. Then, go back to step #3 and start paying them consistently and a little early. Repeat this process until you reach the maximum credit that the supplier is willing to offer.
What if you need supplier credit now?
Building credit and getting terms from suppliers can take months. This delay presents difficulties if you have cash flow problems now and need working capital. This dilemma can arise if your company is growing – or if you get a very large order. One way to handle this situation is to use small business financing. This solution bridges the gap in your cash flow and helps you grow.
As previously mentioned, a common source of financial problems is that suppliers want quick payments while clients want to pay slowly. You can improve this situation by factoring your invoices. Factoring improves your cash flow by financing slow-paying accounts receivable. Instead of waiting 30 to 60 days to get paid by clients, you get an immediate advance from the factor. This funding gives you the money to pay suppliers and manage the business. More importantly, you can use those funds to pay suppliers early – and get the credit building process started.
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