Best Practice: Creating and growing a brand requires capital. Trade credit is ordering products or supplies on credit to lower initial capital needed.
Today’s Article: Access to Capital – Trade Credits
Trade credit is ordering products or supplies on credit to lower initial capital requirements. A supplier may extend you credit after you’re a regular customer for 30, 60 or 90 days, without charging interest.
Example: Dick Schulze built Best Buy with financing from large consumer electronics (his suppliers). Be careful not to give too much power to suppliers and be careful not to allow one supplier to be your only primary supplier.
For start-ups you may have to order c.o.d (cash or check on delivery) or pay by credit card in advance until you’ve established showing that you can pay your bills on time. Having documented advance customer orders or a great business plan can help negotiate with suppliers to get better terms.
Advantages of Trade Credit
1. Easier to get for existing businesses
2. Important option for retail businesses
3. Interest in investing locally
4. Trade credit can be interest free if you pay back on time
5. Have a structured trade credit payback period
6. Any interest or fees paid on trade credit is tax deductible
7. Some suppliers provide cash discounts for early payment
8. Potential future funding
Disadvantages of Trade Credit
1. Debt that a business has to repay – creates more overhead in your business
2. Access to start-up trade credit is more limited without fees
3. Late-payment or delinquency penalties can be very expensive
4. Applicant needs to have good credit and may require running a credit report
5. An outside lender is now involved in your company – choose wisely
6. Can take time to secure, application process
Action Step: Check out suppliers that sell products or supplies on credit to lower initial capital needed.
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