Your Profits: The Right Way to Build Credit with Your Vendors

Marco Terry
April 1, 2014
RETAIL : SALES

For small or new glass companies, buying supplies can be a serious challenge. They must pay their vendors as soon as—or, perhaps, even before—the supplies are delivered. This capital-intensive process means that they must have the cash at the time of purchase.

Larger glass companies, on the other hand, don’t have this problem. They have the financial leverage to demand payment terms from suppliers, giving them not only 30 to 60 days credit to pay invoices but also a cash-flow advantage that is often not available to smaller companies.

Given this disparity, it’s easy to see why most small companies encounter financial problems in their early years. Managing cash flow is difficult under these conditions, but it doesn’t have to be. Small companies can build a credit profile and enjoy the benefits of trade credit—if they do things strategically.

Do you deserve credit?

Before trying to get credit from vendors, honestly assess your company and determine if you actually deserve credit. This exercise is undoubtedly hard, especially for small business owners. Look at your company’s payment habits and determine if you have been paying your vendors according to your contracts. Have you been paying them in full, and on time?

Also, get a commercial credit report from one or more of these major credit bureaus: Dun and Bradstreet; Experian Commercial; or Cortera. Credit reports give you a view of your corporate standing as reported by others. Your vendors, who evaluate your credit, use these reports as well. With this information in hand, you should be ready to move to the next step.

Building a solid credit profile

The first mistake that business owners make when asking for credit is not being prepared. Demanding credit from a vendor won’t get you anywhere unless you have formulated a strategy. The following strategy should work well if you own a small company that pays on time but has not built a credit profile. It can also work for companies with credit blemishes on their track record, but keep in mind that it will take longer to earn your vendors’ trust.

1. Build references ahead of time.

Most companies determine your creditworthiness by reviewing your commercial credit report or credit application. The credit application asks for banking references, legal references and vendor references that can vouch for your payment habits. Line up these references before you start asking for credit. And, call the vendors you plan to list as references beforehand to make sure that they will give you a positive review.

2. Ask for a little at a time.

A common mistake that business owners make is asking for too much credit, too soon. This approach seldom works. If you are just building business credit, ask for a small amount and a short payment period. A vendor that refuses a large line might be happy to extend a small line. For example, don’t request a trade line of $30,000 with net 40-day terms. Instead, ask for a $10,000 line with net 10-day terms. If that doesn’t work, try asking for even less: $7,000 and net five-day terms. The objective is to get your foot in the door. Once you have a little credit, you can build on it. Also, ask your vendors if they report data to credit bureaus. Some might not tell you, but this information is very helpful in the next step.

3. Be smart about paying vendors.

Here is the key component of the strategy. Pay everyone on time—no exceptions. Actually, pay everyone a little bit early to help you build trust and goodwill faster. If you cannot pay everyone early, prioritize your vendor list based on invoice size. Pay the highest invoices from vendors that report to credit bureaus a little early if you can. Pay everyone else when the invoice is due.

4. Build a track record. Then ask for a line increase.

Once you have built a positive track record, say four months, call your most] important vendors and ask for better terms. Again, the key is to take small, incremental steps. For example, if you have been working with $10,000 due in net 10-day terms, try asking for net 20 days or for $15,000. You should cycle through steps 3 and 4 until you reach the maximum credit that your vendors are willing to offer.

5. Pay late: You lose.

Do your best to avoid late payments. A single late or missed payment can ruin the trust you have built with your suppliers. Above all, always be fair, open and honest with your suppliers.

6. Consider financing.

If you experience cash-flow problems and need money to pay suppliers, consider temporary financing. This approach is often better than missing a vendor payment. You can use options such as SBA Microloans, invoice factoring or lines of credit to handle supplier payments while you build your commercial credit.

The author is managing director of Commercial Capital LLC, a leading provider of working capital to companies in the glass industry. Contact him at 877/300-3258.