Supplier Credit: What It Is and How It Works
Three major contributing factors to the success of your small business are cash flow, supplier relationships, and business credit.
When leveraged correctly, supplier credit financing supports all three and can be integral to helping you thrive in your industry. To learn the ins and outs of supplier credit and see what it looks like in action, read on.
What is Supplier Credit?
The premise is simple. Rather than paying an invoice upfront, a supplier credit allows a business to pay it back at a later date. Supplier credit is also called vendor credit or trade credit.
Some common supplier credit financing options include:
Say, for example, an office supply company offered net 30 payment terms to a buyer. Once the buyer makes a purchase, they have 30 days to pay the invoice in full.
Or if there were net 60 terms, the buyer would have 60 days to pay the invoice. Net 90 terms would give them 90 days, and so on.
Under this arrangement, the supplier acts as a temporary lender, extending buyer credit that allows the business owner to purchase items while giving them some wiggle room with payment.
This is beneficial because it gives a business owner increased cash flow, as they can pay the suppliers credit at a later date.
Like other forms of business funding, such as equipment financing and revenue based financing, this gives a business owner the chance to establish trust and build relationships with suppliers, which is critical to gaining momentum.
And perhaps most important of all, this allows a business owner to build business credit.
As long as the supplier reports payment history to at least one major credit bureau and the purchaser makes timely payments or early payments, this builds valuable credit that can help secure future business financing.
This can come from additional sources like other vendors, an exporter, an overseas bank, an overseas lender, or a credit card from a reputable financial institution.
How Does Supplier Credit Work?
There are five main steps involved in this financing arrangement.
First, the supplier and buyer agree on a specific payment term.
For instance, an importer may agree to net 30 terms on an export contract with an exporter, where the importer has 30 days to pay the invoice.
The importer may also agree to have a minimum purchase order (e.g., a $50 minimum) on an export transaction, as well as other fees, such as an annual fee for supply chain finance.
And there may be a credit memo or credit note from the exporter that outlines any specific details regarding procurement, payment deadlines, and future purchases from the foreign buyer.
Second, the supplier provides the buyer with the agreed-upon goods or services.
Third, the supplier gives the buyer an invoice without requiring immediate payment, extending the buyer’s credit. At that point, the buyer has a certain timeframe to pay for receivables to honor the commercial contract.
Fourth, the business owner must pay the invoice on or before the end of the credit period.
Finally, the supplier may report the transaction to one or more credit bureaus. Note that this isn’t required and isn’t done by all suppliers. But it’s essential for improving your commercial credit.
Therefore, if one of your main goals of getting deferred payment through supplier credits is to improve your credit profile, you’ll want to be sure that a supplier reports financial statements to at least one major commercial credit bureau.
Supplier Credit Example
To put the pieces together, let’s look at a real-life vendor credit example from Uline — one of today’s top shipping supplies companies. They currently have over 43,000 shipping supplies in stock and a straightforward supplier finance program with net 30 terms.
Uline gives simple instructions on how to leverage this financing solution.
“Use your customer number from the back of your catalog when prompted. Select ‘Invoice Me’ during the checkout process. Qualified business customers will receive a net billing account, which allows for payment within 30 days of receiving the invoice.”
Note that Uline reports to two major credit bureaus — Dun & Bradstreet and Experian Business. So as long as there is no late payment on the credit balance, business owners will have their positive payment history reported, which should help raise their commercial credit score.
You can see a full overview of Uline's supplier credit here.
Building Business Credit with Supplier Credit
We’ve touched on the basics of how to strengthen your credit profile throughout this post, but let’s recap and go into a bit more detail.
An essential precursor is to ensure that any supplier you partner with reports to at least one major commercial credit bureau, which includes D&B, Experian Business, and Equifax Business.
Otherwise, it won’t matter if you maintain a positive payment history, make an advance payment, or even an immediate payment, as nothing will be reported.
This brings us to the second part of the process. You must always make credit line payments on time or in advance.
Being late even once can be detrimental because this will get reported to a credit bureau, which, in turn, will lower your commercial credit score.
But as long as you consistently make timely payments, your credit should improve. And the more suppliers you partner with, the bigger the impact should be.
Expediting Your Credit Building with eCredable
Supplier credit is one of the most reliable ways to build commercial credit and unlock future business financing opportunities. That said, it has its limitations — mainly that you need 5-10 supplier relationships to gain any real momentum, and it takes time to see tangible results.
One of the best ways to accelerate the process is with eCredable, which treats business utilities like electricity, water, and internet as tradelines.
Rather than having to form partnership after partnership with different suppliers, eCredable conveniently reports your utility payments so you can build credit with no heavy lifting.
In turn, you can significantly raise your credit score by simply making the business utility payments you would anyway. Learn more here.