X-Banker

What is Trade Credit?

April 7th, 2008

By The XBanker

Trade credit is the single-largest source of lending in the world and probably one of the least understood by entrepreneurs. Trade credit, also known as business credit or commercial credit, is the lending between businesses. The most common form of trade credit is the extension of payment terms, or the ability to pay an invoice in 30 or 60 days rather than with cash upfront. Other business will extend a line of credit, that you can pay over time.

The key to managing cash flow for your business is to get paid as soon as possible by your customers and to wait as long as possible to pay your suppliers. The alternative is to pay suppliers with cash upfront. This requirement puts a strain on your business’s cash flow. I worked with a steak house a couple of years ago that needed $20,000 each Thursday morning to pay for a week’s worth of steak. The supplier wouldn’t unload the truck without cash in hand. This put a strain on the business and required them to bring on an investor to front the cash each week. With trade credit they were able to pay for the steaks the following week, enabling them to pay for the meat with the revenue generated by selling it. By establishing business credit they were able to reverse the cash cycle, drop an investor and save oodles in hard money interest.

It is important to have as many financing options as possible for your business, so don’t make the mistake of overlooking trade credit. Trade credit is one of the very few options that will help you build your business credit score and most of the time it can be obtained without a personal guarantee and regardless of your personal credit score. You don’t have to be in retail or manufacturing to take advantage of trade credit. Just about anything manufactured or sold by another business can be obtained by business credit. The first step is to start building business credit so that you can take advantage of the wide variety of programs that are available to you.

This entry was posted on Monday, April 7th, 2008 at 10:43 am and is filed under Alternative Financing, Business Credit, Finance Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

1. Tomas Zubicek said at April 7th, 2008 at 1:57 pm

   It is very good post mr. X . Just some points from my experience .
   30 days terms are pretty easy to get obtained , regardless of credit score , some flor plans for a longer terms too , depends on the type of business you are into.
   I got funny situation however . I got a contract with the City Hall for many weed trimmers during the year. My terms with supplyier are 30 days to pay them . The City terms with me are 30 days to pay me . So everytime I order the equipment and the City is picking it up , I have a few days to catch up.
   Well , that’s the fun in being an entrepreneur , you got to be able to maneuver . It is fun , once you figure it out …
   Good post , keep it up.. TOMAS

2. Business Financing For Those With Bad Personal Credit | The XBanker said at April 24th, 2008 at 11:51 am

   [...] Trade Credit [...]

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