The need for financing is a critical and perennial concern for your start-up business. You will need “seed money” to launch the business to cover costs such as equipment, fixtures, supplies, among others. You’ll also require money for your daily operating expenses inventory, rent, taxes, salaries and wages, advertising, utilities, etc.
You can launch your business using your personal resources. But you may find yourself quickly reaching the stage where you must look to the credit market for financial help in sustaining and expanding your operations. The type of financing you seek depends upon how much you need, how you plan to use it, how long you need it and how you’ll pay it back.
One way of financing your start-up is through business or supplier credit. Inventory typically is among the biggest cash drains of a business, and using supplier credit can help ease your cash flow. Many suppliers have developed credit programs where they provide the goods on credit; you pay for them, with interest, over a specified period. You can get 30-days term with a limit on how much you can avail as you develop your relationship with the supplier. However, as your business transactions grow, the supplier can provide more lenient payment terms, such as three months to pay or discounts for prompt payment.
Advantages of Using Supplier Credit
Peter Hingston and Alastair Balfour in the book “Working From Home (Small Business Guides)” offer four advantages of using business or supplier credit to finance your start-up:
- You can get goods or services but not pay for them until some specified later date.
- Helps you through lean financial periods.
- Receiving business credit helps improve your cash flow dramatically.
- Reduces the need for short-term loans.
As a new company, you need to establish good relations with the supplier, and let them know that you honor and pay your obligations. When you’ve developed excellent reputation with them, you may be able to request for an increase in credit line, longer repayment terms or perks such as early payment discoounts.
Disadvantages of Using Supplier Credit
Using supplier credit also has its disadvantages.
As a new business, you may be refused business credit, as you are an unknown credit risk. Most companies offer supplier credit only to established businesses. They may insist on deposits or cash on delivery until your business has established a reputable history with them. It is important to understand that before a supplier credit is approved, suppliers often check your credit rating and the credit capacity of your business. With your business being so new, you may not have been able to establish a credit history that reflects your repayment habits.
The supplier may still grant you the credit, but they can stipulate stiff conditions in your contract. They may even ask you to get a guarantor to back-up your credit line. Make an assessment concerning the affordability of the credit at the time that the contract is entered into, not later. Always remember that suppliers are not there to help you: rather, their main purpose is to make a sale. Hence, they will not be interested in any problems you may face later in the day when there are difficulties making repayments.
It is also important to remember that if you are unable to pay or you are late with payments, doing so can negatively impact the credit history of your business (as well as yours if you are personally guaranteeing the credit). Make sure that you pay promptly, especially at the beginning of the relationship with the supplier.
- How to Get Business Funding Without a Personal Guarantee
- Using Crowd Funding Sites to Raise Money for Your Small Business
- Where to Find Investors: Entrepreneur-Investor Matchup Sites
- What is Factoring?
Recommended Books on Financing a Business including Supplier Credit:
- How to Get the Financing for Your New Small Business: Innovative Solutions from the Experts Who Do It Every Day
- Financing Your Small Business: From SBA Loans and Credit Cards to Common Stock and Partnership Interests (Quick Start Your Business)
- Unlimited Business Financing: Learn How To Obtain $250,000 Or More In Business Funding Without Harming Your Personal Credit
- Small Business Finance All-in-One For Dummies
- Spank The Bank: THE Guide to Alternative Business Financing
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Category: Finance a Business