Using Supplier Credit

One way of financing at least some of your working capital is applying for and using supplier credit to purchase your inventory.

A Definition

Supplier financing or trade credit is where your supplier agrees to supply you with inventory on a credit account, possibly with extended credit terms, and can be a valuable source of start up finance.

Advantages of Having a Credit Account with Your Suppliers

Not all suppliers will be prepared to offer credit to a new (unproven) business but it is an option worth investigating with your suppliers.

If you can agree terms with your suppliers you may be able to sell the goods and receive payment for them before you have to pay the suppliers account, reducing your need for working capital.

Applying For Credit

When you approach a prospective supplier ask them about their credit terms, most will have standard terms of net 30 days. If you want to trade on credit you will be required to fill in a credit application form and give the supplier permission to check your credit rating before they agree to offer you credit.

However, bear in mind that many of your prospective suppliers may not be that keen on lending money, which is effectively what sell to you on credit terms is, to an untried and unproven business.

You may be required to offer a person guarantee for the debts of your small business, or be asked to trade on a cash on delivery basis until the trading relationship is more established.

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