One source of capital that businesses often overlook is Vendor Credit. Without a strong banking relationship and credit history dealing with any bank as a small business looking for a traditional loan or a working business line of credit can be very difficult and frustrating.
Most business owners fall into the trap of relying on their personal credit, if they have good enough personal credit that is, to fund their business. Most overlook a simple and readily available option. Businesses that want tp that sell products and services you your company have a vested interest in your growth. Many offer trade lines (vendor credit lines) to help their customers finance purchases. These companies are not “bankers”, they are business people. They offer credit terms to give them a competitive advantage in the marketplace.
Many will offer 10 day terms as a courtesy, to keep clients from having to stop what they are doing when a delivery shows up and write a check. Some offer 30 day terms that allow their customers to stock extra inventory and group purchases. If you have no established credit, it is likely that you will only be able to arrange 10 day terms on purchases, and only after you have built a relationship and paid up front for a few orders. Once you have your credit established with a vendor the terms can be extended over time, as you prove yourself credit worthy, to 30 days or even longer in some industries.
Vendor Credit is an exceptional tool in many ways:
1) Vendor credit helps your cash flow. Often you can purchase a product on terms, market it, and collect on it before you need to pay the vendor.
2) Vendor credit lets you create a D and B file and Paydex score, so that the next time you go to see your bank you will have the established credit that they wanted to see.
3) By paying vendors 10 days early you can build an 80 Paydex score (required for most loans) with just 5 or 6 vendors in just a few months.
4) Your credit lines with each vendor will increase over time as you build your payment history with them. As your credit lines grow with vendors over time, your credit limits on bank loans and lines of credit will also grow.
5) Most vendors will allow LLCs or Corporations to apply for credit without the owners personal guarantee. This keeps your personal credit available for other needs.
Most vendors do not share trade references with Dun and Bradstreet. However, if you Join D and B you can ask them to include your vendor credit references and they often will.