How your business can build credit with suppliers
How good relations with your supplier can ease cashflow concerns
Building up a good relationship with your supplier is important for obvious reasons. When you have a solid relationship built on mutual trust, you know you can depend on your supplier to deliver on time. Likewise, he knows he can rely on you to pay on time. But this is worth considering too: if you are in a position of trust with your supplier, you are in a position to negotiate better terms.
This is particularly important when you are first starting out and money is tight. Cashflow can be improved no end if you can secure better terms on credit.
In simple terms, trade credit is a ‘grace period’ suppliers afford to businesses before calling for payment. For example, you could have 15 or 60 days after purchase to pay for your items (known as “net 15” or “net 60”, respectively.)
So essential is this lee period that suppliers often offer good terms on trade credit in a bid to attract new customers.
Alternatively, your supplier may offer credit in the form of a percentage discount on your invoice if you pay within a fixed period such as ten days. Or credit may be offered by way of quantity discounts, equipment loans and consignment sales, i.e. payment only on sale of goods.
Whatever form it takes, credit is an important consideration and a good reason to build up positive relationships with your suppliers. It allows you to generate revenue from the sale of the goods you buy before you actually have to pay for them.
Trade credit is often easier to secure than a similar short-term, interest-free loan from the bank because you do not require collateral. This is because the supplier is usually insured on the credit they offer to cover their risk.
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With all this in mind, when you are first deciding on which supplier to go for it’s a good idea to determine which ones can serve most of your needs. This way, you will not have to work out terms with too many companies.
Emphasise to potential trading partners that you are seeking to establish a long term relationship and if you’re in a position to do so, share your annual projections for cashflow. The supplier will trust your ability to cover payments if they have an idea of your incomings, outgoings and financial obligations.
Always, always have your credit terms in writing.
As time goes on, and your relationship with your supplier becomes more stable, you can secure longer lee periods before payment is required. To better the chances of extending your credit, make sure you always pay on time, or even ahead of schedule when your balance sheets permit.
And whatever you do, if you want to keep on the good side of your supplier, ensure that you do not fall into the trap of testing the limits of his credit terms. You could stand to pay penalty charges for late payments, but worse, you will lose the trust of your supplier. If this is the case, your credit could well be revoked.