The first type of Unsecured Business Line of Credit are commonly known as either trade credit or vendor credit. These are forms of credit issued by companies, usually suppliers. The terms are usually Net 30. Think about it like this. You’re a plummer working on a commercial job and you need 3 large rooftop air conditioners to be installed at the school you’re working at. You pick up the units from the plumming supply company and they invoice your company and expect you to cut them a check and pay for the units within 30 days. That’s trade or vendor credit. It’s normal. It’s common. It happens thousands of times every single day.
Here are some characteristics about trade or vendor credit:
– Very common but also the least sought-after form of the 3 kinds of UBL’s
– Terms can be either Net 30 or in some cases revolving
– Often associated with business credit building strategies and programs**
– Revolving terms are much more valuable and desireable since you do not have to pay the balance in full
– There’s virtually no end to the number of vendors you could establish trade accounts with. The only catch is that not all businesses offer these types of business credit accounts.
– Net 30 terms basically have no “cost” but could assess fees in some cases if they are not paid within the 30 days. Some offer 2% discounts if paid within 10 days.
– With companies who issue this type of trade credit with revolving terms they typically have pretty high APR’s or annual percentage rates. Companies like Dell, Staples, Home Depot, WalMart, Exxon, and Shell all offer revolving terms and you’ll likely see APR’s from 14-29%.
– With trade credit your personal credit profile and scores are typically less important and often times irrelevant.
– You can obtain trade credit as a new business, although it is more challenging and does require an plan or a strategy that knows which businesses to set these accounts up with first.
– You will rarely need full financials to establish trade credit.
Trade or vendor credit is the easist of the 3 UBL’s to obtain. It is probably the least desirable of the 3 forms of unsecured business lines of credit but it still has great value. Getting favorable terms can be invaluable for you as you build your business. It’s also important to note that favorable terms should be thought of in terms of the cash-flow more than the interest rate. In other words would you prefer a rate of 13% and the monthly payment is lower than a rate of 9% where the monthly payment is much higher? Most people would but they also normally only look at rates. Look for “cash-flow friendly” financing as you’re seeking your capital.
**Business credit building strategies normally require initially setting up net 30 accounts with places like Quill, Uline, Gemplers, Grainger, and many other suppliers who grant trade credit. It’s important to note that if you are working on building your business credit that I would recommend seeking these type’s of net 30 accounts plus your revolving accounts without PG’s or personal guarantees. This is ONLY true for trade credit and NOT for the other two types of UBL’s.
As a final note, we don’t do much at LenCred with trade or vendor credit but we do firmly believe in the value of building your business credit. If you’re serious about your business there probably isn’t any reason why you would not want to have good business credit. Just be mindful that there are a lot of companies offering business credit building services. It’s probably best to look for someone based on the value they offer rather than price. It’s not something that should be done by anyone other than an expert.
Stay tuned for Part 3 of this series where we will discuss the most sought-after and most elusive of the 3 kinds of unsecured business lines of credit.