As a small business owner, obtaining capital for your business is one of your top priorities. One of the ways to do that, especially for new startups, is through vendor credit. 

Vendor credit can provide businesses with an opportunity to get the supplies, inventory, or services they need, along with extra time to pay for them. 

What’s more, some vendors can help your company establish and build its credit history, making it easier to get approved for other forms of financing when you need it. 

Here’s what you need to know about vendor credit, including how it works, how to get it, and how it can help you build business credit.

What Is Vendor Credit?

With vendor credit, a vendor essentially lends money to a business, which uses it to purchase the supplies, inventory, or services that the vendor provides. 

In return, the business agrees to pay back the vendor in full within 30, 60, or 90 days — typically referred to as net-30, net-60 or net-90. Payment terms can depend on the vendor and its relationship to the business.

For example, if you’re just establishing a credit relationship, the vendor may only offer net-30 terms. But over time, you may be able to get access to longer terms if you pay on time— or even early.

Depending on the vendor, payments may or may not include interest. In some cases, you may qualify for a discount on your purchase if you pay early. 

If you miss a payment due date, though, you may be subject to a late fee. If you’re late often enough, the vendor may sever the credit relationship.

Vendor credit is also sometimes called trade credit or supplier credit because it involves financing from a trade or supply partner instead of an institutional lender. 

Vendor credit can help small businesses with their working capital, giving them time to make a payment instead of demanding immediate payment. It may also be the most affordable way to get financing for new businesses that don’t qualify for other traditional forms of business credit.

How Do I Get Vendor Credit?

Getting access to vendor credit can be easy if your business has been around for a while and has a strong financial track record. Even if your company is new, though, it’s possible to get approved.

Here are some ways you can get access to vendor credit for your business:

• Check for an application with your existing suppliers: If you already have supplier relationships, start by checking to see if they have an application for paying invoices on a deferred basis instead of at the time of purchase.
  
  You may be able to find this information on the vendor’s website or by calling your contact with the company. If the supplier offers trade credit, submit an application.
  
  Your chances of getting approved may be higher if you’ve had the relationship for a while and have consistent orders with the supplier.
  
• Call existing suppliers and ask to pay back on terms: If you can’t find an official application for vendor credit, consider contacting your suppliers via phone or email and asking if they can make your invoices payable on a net-30, net-60, or net-90 basis.
  
  If it’s an option, you may need to negotiate terms based on what works for you and the vendor you’re dealing with.
  
• Shop for new suppliers that offer trade credit: If your existing vendors don’t offer vendor credit, consider shopping for new suppliers that can provide you with that form of financing.
  
  There are several starter vendors with net-30 accounts that are relatively easy to get approved for, but take your time to compare multiple suppliers based on your needs to find the right fit.
  
  Keep in mind that it can be more difficult to get approved for vendor credit if your relationship with the supplier is new. But it can get easier over time as you establish multiple trade credit relationships with new and existing vendors.

How to Use Vendor Credit to Build Business Credit

Supplier credit can provide an excellent opportunity for small businesses to manage their working capital and cash flow. But for many businesses, especially new ones, it may be even more important to use vendor financing to build business credit. 

Building business credit is crucial because it opens up more opportunities to get financing in the future. 

Traditional business loans often require that you be in business for at least two or three years, that you have a strong financial track record, and that your business has a good credit history. 

It’s especially important for loans that don’t require a personal guarantee so that the business is solely responsible for repayment.

Here are some steps you can take to leverage the vendor accounts you have with your suppliers to establish a positive business credit history and set your business up for success:

• Establish and maintain good credit relationships with vendors: If your existing vendors offer trade credit, don’t delay taking the time to establish a credit relationship. If they don’t, shop around and compare suppliers that do offer financing terms, so you can start taking advantage of the arrangement.
  
  Be sure to do this with vendors that you use regularly, as regular payments will help build your business credit more quickly.
  
  As you use your vendor credit regularly and responsibly, you’ll have an easier time getting vendor credit with more suppliers, which can help with cash flow management even more and also make it easier to build your business credit.
  
• Pay on time all the time: As with any debt obligation, it’s crucial that you always pay on time. If you can, it may even make sense to pay early.
  
  As previously mentioned, some suppliers offer a discount if you pay your vendor bill early — for example, you may get a 2% discount if you pay within 10 days instead of 30 days. Also, if you want to obtain a perfect Dun & Bradstreet PAYDEX score, one of the major business credit scores, you need to pay your bills 30 days ahead of schedule.
  
  If your business is struggling and you’re not sure you can pay on time, contact your vendor right away to discuss potential solutions. If you have a good relationship with the supplier, you may be able to avoid having a late payment reported to the business credit bureaus.
  
• Make sure the vendor reports your payments: On its own, trade credit can make it easier for your business to manage its cash flow.
  
  But unless it’s reporting your payments to the business credit bureaus, it’s not helping you build a business credit report. The four major business credit bureaus include Dun & Bradstreet, Experian, Equifax and Paynet. The SBFE is another organization that you want payments reported to, as well.
  
  Before you establish a trade credit relationship with a supplier, ask if they report your payments to the business credit bureaus and which ones they report to. If the vendor doesn’t report, ask what it would take for them to start doing so. If they don’t report at all, consider another supplier.

The Bottom Line

Vendor credit can be an important tool for small business owners to better manage their working capital as well as establish and build a business credit history. 

What’s more, it can be an easy way to get financing if your business is relatively new and doesn’t yet qualify for other major forms of business financing.

If you’re already working with vendors to get your supplies, inventory, or services, ask if they offer trade credit and what it will take to get approved. If they don’t, consider switching to a supplier that does offer vendor credit. 

Once you’re set up with vendor credit, make sure you know which credit bureaus your payments are being reported to, and make it a priority to use your vendor credit lines often and make payments on time or early to maximize your relationship with them.

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