Getting credit to fund stock for your business

Find the finance for your stock

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When trying to raise funds to buy wholesale stock, the options available are much the same as when dealing with any other purchases for your business. You can arrange a loan, agree an overdraft with your bank or get a credit card.

The size and requirements of your business and the wholesaler you are dealing with will heavily influence which option you go for. However, traditionally, businesses will mainly cover wholesale expenses using overdrafts.

However, despite the fact that overdrafts are flexible and do not require the same demanding levels of security as loans, firms are increasingly overlooking them in favour of other credit methods. It is estimated that overdrafts now make up just 30 per cent of bank lending, the lowest level for years.

This is perhaps not surprising. Overdrafts can be called in by the banks at any point, and the risk of this happening increases during an economic slump.

If this happens as you are about to buy goods for your firm, not only is your credit wiped out, you will probably be left with no stock, putting your business at risk.

Loans are another option open to small firms looking to buy in bulk from wholesalers. Unless the terms of a loan are breached, they cannot be called in by the banks like overdrafts and with the competitive rates of interest on offer, you could secure yourself an effective source of finance.

However, loans are generally suitable for large, one-off purchases. As buying goods for your firm will be a regular, perennial process, you're likely to want something more flexible.

Credit cards

Credit cards may not be your first thought when considering payment options but they have several facets that make them highly useful for purchasing wholesale stock.

“Personally, I have used credit cards to purchase stock,” says Grady. “This is because this method of payment normally allows 56 days interest free credit, which means you can sell the stock before you have to pay for it.”

Of course, this strategy depends on your ability to budget wisely and sell on all your supplies before the credit card bill lands on your doormat. It is prudent to work out how much demand there is more your products or services by making a few cautious purchases before looking for a credit card with a favourable rate of interest. This allows you to be confident that you will be able to make a profit, or break even, on your stock before committing to large credit card bills every month.

Credit from wholesalers

If you can't get any more credit from the bank and don't want to use a credit card, do not despair, it's possible to get a very good deal from the wholesaler.

Wholesalers are generally a traditional and pragmatic bunch, so it is well worth the effort to build up a good relationship with them to open up the chance of being offered credit and even discounts. Trust is very important to wholesalers, so when you find a reliable supplier, it is worthwhile to stick with them for the long haul to become a valued customer. This wholesale love-in can reap significant rewards for your firm.

“Most wholesalers of a reasonable size will arrange credit for their customers where applicable,” says Richard Grady. “Obtaining credit from a wholesaler is really no different from obtaining credit from anywhere else in terms of the best way of ensuring your application is successful.

“I would recommend trading with the supplier for a few months on a ‘payment with order' basis, as this will build your relationship and also allow the wholesaler to see how much money you are likely to be spending.”

Once you have an understanding with your wholesaler, it is then simply a case of requesting a credit account and filling in the necessary forms. The wholesaler will probably run some checks into your credit background and that of any business partners, much like when you take on a traditional bank loan.

Barring any previous Enron-style ‘mistakes' you will be able to take advantage of wholesale credit at agreed limits. However, some suppliers will delve deeper into your past and ask for references from other wholesalers. It is therefore best to leave on good terms, both financially and personally, with all your previous suppliers.

Wholesalers may also ask your bank for a reference, although this is now increasingly rare. Again, as long as your business heroes aren't Robert Maxwell and Nicholas Van Hoogstraten, you should qualify for credit.

It's possible to get a very good deal from the wholesaler.

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