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The Truth About Small-Business Credit
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Article 5: Get Credit From A Supplier
When most of us think of borrowing money, we think of our local banks. Banks, though, are only one source of funding. Suppliers also provide operating funds when they agree to extend terms for 30 or 60 or 90 days.
You should have a valid purpose for requesting extended terms. One such purpose is the funding of delays in receipt of cash from your own customers.
“Ask yourself if you are requesting credit because whatever product or service you are buying will not be generating money for you before you incorporate it into what you sell to your own customers,” suggests D. Brent Wells, a certified creditors rights specialist and president of Wells & Cuellar, a Houston-based law firm that helps businesses design efficient credit programs. “If the answer is yes, then it makes sense to request vendor credit to fund the delay.”
Base your credit request on a careful analysis of the time frame required for the receipt of revenues generated from the goods or services.
How about the idea of stretching out your vendors as much as you can, simply as a matter of policy? You might be tempted, for example, to ask for 90-day terms even when you really don't need them. Or you may even be tempted to pay your vendors beyond the date of the agreed terms. Your idea might be that any delay in payments results in cash that you can invest for a profit.
The problem is that such profits are almost always illusory.
“When exploiting the generosity of vendors, remember there is always a cost of credit,” cautions Wells.
That cost can be assessed in many forms.
One is the foregoing of the discount you would receive for prompt payment. Another is the interest often built into your purchase price for the credit allocated. Finally, if you make a practice of paying later than your designated terms, you may pay the higher prices often charged customers with a reputation for tardiness.
As with bank loans, avoid using vendor credit to pay for recurring expenses such as payroll and taxes. This practice, commonly encountered in businesses which are over-leveraged, is courting danger. You may end up in a cash squeeze if an unexpected problem arises, such as the loss of a customer to the competition.
“If you encounter problems that interrupt the revenue stream, you can end up in a crisis mode in a hurry,” says Wells.
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