Trade Credit Often There for the Asking

NEW YORK ( TheStreet) -- "Buy now, pay later" is a tactic retailers use to attract consumers.

Trade credit, or vendor credit, is the business-to-business take on that strategy, letting owners finance the purchase of supplies, merchandise, even equipment, typically between larger businesses and suppliers.
Trade credit, or vendor credit, could be a good financing alternative for small businesses.

What small-business owners may not know is that trade credit is probably available to them if they just ask for it.

"Smaller businesses generally haven't been aware that it's really there. It's something that I recommend to small businesses to explore when they're looking for financing," says John Seelinger, a business counselor with SCORE, a nonprofit association geared toward educating and helping small-business owners with their businesses. SCORE is a partner to the Small Business Administration.

Since bank loans are still hard to come by, despite more banks opening the spigots for small-business lending, trade credit could be a good alternative. It is generally cheaper and easier to get. Suppliers will likely require a credit check, but the agreements are usually not collateralized.

In the down economy, suppliers are "looking for sales too, and they're more interested in moving their merchandise," Seelinger says.

Industries in which trade credit is popular includes agriculture, automotive, construction, electronics, health service providers, medical equipment, manufacturing and retail, experts say. Recipients are often small businesses whose cash flow could vary significantly from month to month.

"Don't be shy to approach it with your supplier," Seelinger says to the owners of such businesses. So long as there is a good relationship between owner and supplier, they could be happy to provide trade credit -- typically short term, usually 30 to 60 days, but sometimes longer for heavy equipment or machinery. Terms are typically interest free for short-term arrangements, and some suppliers could even be amenable if the business owner needs more time to sell the goods.

At times suppliers will encourage early payment with incentives, such as discounts for invoices paid within a certain time, experts say.

"Cash flow is everything in a small company, so it's worth looking at anything that can help with that," says Alice Bredin, a small-business advisor to American Express' ( AXP) OPEN network.

Business owners will want to keep the relationship in good standing by paying the negotiated terms on time, otherwise the supplier could cut off future shipments. That means no messing around: The negotiated terms should be ones a business owner is able to pay, Bredin says.

Separately, American Express offers trade term benefits to business users of their Plum Card, which is typically used to buy supplies, inventory and raw materials.

There is no spending limit on the charge card (purchases are determined by other factors), and users can defer payment up to two months. (Note that the card is a charge card, which means the balance must be paid in full each month.)

The American Express Plum Card also offers discount incentives to those users who pay their balance early.

>> 6 Credit Cards the Pros Pick for Small Business

Trade credit is probably harder to get as a newer business owner, Bredin says.

Daryl Toor, assistant vice president of media relations for Equifax ( EFX), says small-business owners will want to make sure their business credit report is established and clean before negotiating vendor credit terms.

Lenders and suppliers are becoming much more careful about where they extend credit, he says.

"The main thing is make sure that their house is in order by having a good credit score and positive credit history, so that when the supply side pulls the credit report, business owners have the ability to address any questions," Toor says.

Once the credit terms are agreed upon, Toor says that the only time a payment would be reported to the credit agencies is if the supplier is not getting paid and turns the debt over to a collection agency.

If the debt is deemed uncollectible it remains on the business owner's credit history for up to seven years; in California it could stick for up to 10 years, Toor says.

To contact the writer of this article, click here: Laurie Kulikowski.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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