New businesses looking to establish relationships with suppliers may face some challenges to obtain credit. It is a common practice for suppliers of goods or materials to extend credit to a business, understanding that manufacturing and sales takes time. An arrangement of shipping supplies with payment due 30-90 days ‘net’ is one way for a business to get the goods that they need and delay payment to their suppliers until they can make enough sales.
However, for a new business, the supplier has to have some way of knowing whether you are credit worthy and that you will actually pay for the supplies as agreed. In this case, there are a few ways to show suppliers that you are a viable business and will make payment on time. In many cases, it will depend on the supplier, their experience, how much they need new customers, and ultimately it well be dependent on their risk tolerance.
Business Credit Rating
Business credit ratings are often based on ‘trade payment history’ with other suppliers, and whether there are any past due payments reported. There are other factors as well that affect the credit rating, but this is the one that a prospective supplier will look at the closest. But if you are a new business, then there may be little history to refer to, and other ways will have to be found.
Factoring is a method of using your accounts receivables as collateral for credit. Of course, you have to have some orders first before you can use this method. This is a good way to gain the trust of a new supplier for an initial order, and once payment is made they may be willing to extend credit more easily on subsequent orders. For a new business with existing orders, this is probably the best method to secure credit with a supplier, since they don’t have to take very much risk.
Credit and Financial References
If you have financial or banking references then these can be shared with suppliers so that they can see how you have worked with other types of lenders. It may not be enough on its own, but could be helpful in giving the supplier additional confidence. Also, accountants or attorneys that you work with could offer to send letters of reference, attesting to your financial status or professional credibility.
While it is not generally recommended, at first it may be necessary to guarantee a credit arrangement with personal resources. This assures the supplier of payment, but could also undermine your efforts to establish a separate business identity, such as a corporate structure.
Having a verifiable business identity allows a supplier to validate your business as a real and ongoing entity. Business name, address, contact numbers and any identifying materials can all give a supplier the confidence that payment will be made as promised. This also gives them the business contact information in case there is a dispute of any type.
Business credit with suppliers benefits both parties, and most suppliers understand that a part of their business is waiting for payment from their customers. They are looking for reliable businesses to work with, and if you make the effort to show them that your new business has a sound financial plan and ready market, then they may be willing to take a risk. Using some of the methods outlined above can give creditors the assurance that you are worth the risk, and plan to be a steady and reliable customer for the future.
Article on avoiding bankruptcy by Credit Professor