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Businesses have access to five types of Business credit. The first one is the most obvious, and that is your bank credit line backed by business or personal assets and personal guarantees. The second is non-asset based like credit cards used by many small businesses and start-ups. The third is trade credit, like vendor-supplied, unsecured lines of credit for purchases of their product. The fourth is equipment leasing and the fifth is tapping into your customers' credit strength. The last one is the most important one that many business owners do not know exist.
The third, trade credit will only apply to businesses that purchase raw goods or inventory for resale. It is much easier to grow your vendor credit lines than asking a bank to extend credit. Most businesses purchase 80% of their goods from a few vendors. Is your business able to take advantage of 2% net 10 day terms? Most businesses are not taking advantage of early pay discounts due to money being tied up in receivables.
Why is it important to manage your business credit with vendors?
Your business credit can save you money or cost you money. Presenting your business in the best light can directly increase your bottom line. Your company may look financially unstable or unhealthy when you continually pay past your credit terms and this can cost you money!
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It is standard in most industries to offer 2% net 10. Some industries offer more but will not print it on their invoices. You may want to call and ask the comptroller and see if they will offer a 4% net 10. Call competitive vendors and see what their terms are to make sure you are getting a good offer for paying within net 10 days. We have seen as much as 10% for net 10 day terms. But be careful. If not, you might just be giving away a price reduction you might have been able to negotiate anyway.
By factoring receivables, you will be able to take advantage of early payment discounts from all your vendors that offer these terms. In order to increase your credit lines with your vendors, you need to be in very good credit standing before you ask. Businesses that take advantage of these terms every month are far more noticeable by the credit department.
Vendor credit lines can grow faster than a bank credit line if you play your cards right. In addition, vendors rate customers by volume and ability to pay. Some business owners have a better edge when it is time to negotiate better prices by having a history of paying their bills on time.
The fourth credit line is off-balance sheet equipment leasing. When you can provide bank statements with good cash flow and establish four trade references you can brag about. You should be able to buy equipment at very low rates. Equipment leasing offers advantages over a bank loan because it shows up on your balance sheet as rental equipment and not a liability like a bank loan. The key is to reflect as little liability as legitimately possible on your balance sheet.
So how do you tap into your customer's credit strength?
The fifth credit line is one that many businesses do not know about. By factoring your accounts receivable, you will be able to tap into your customers' credit strength by obtaining advances against funds your customers owe you. A factoring company establishes accounts receivable
credit lines based on your customer's credit or ability to pay, not yours. Factoring is not a loan, and the funding of invoices is viewed as a purchase of a company's invoices. For example, let's say you have 10 large customers with good credit ratings, and each is assigned a credit facility of $250,000 based on their ability to pay. Factoring your accounts receivable enables your business to sell on net 30 day terms for up 2.5 million dollars. At your option, you can ask the factoring company to fund your invoices daily or what ever meets your needs.
With the increased of cash flow, you can take advantage of early payments to vendors with 2% net 10 terms and offset some of the cost of factoring. It is that simple. This is far more leverage than a bank will ever assign.
In summary, By increasing cash flow through factoring, you might be able to negotiate better terms from suppliers and vendors, qualify for preferential pricing, and keep your balance sheet debt free.
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