There’s a lot of talk circling about vendor credit and business tradelines, this form of credit is necessary for establishing business credit scores and indexes.
A vendor is an organization who sells products, services, and raw materials; vendors can be valuable to companies who buy products and services upfront or deferred with payment terms. Every vendor has their own procedure toward payment terms – some do not offer any and require payment on receipt, others offer qualified customers Net-15 or Net-30 terms. Net-payment terms act like a small line of credit or loan, that must be paid off by the term date. Vendors will determine what terms to offer based on the financial status and business credit scores/indexes of the company.
There are three major business reporting agencies – Dun & Bradstreet, Experian, and Equifax, as well as, several smaller credit bureaus.
Business vendor credit
Helps to increase your recommended credit limit.
Dun & Bradstreet recommends a conservative and aggressive credit limit on each report. They base the limits on credit history with vendors, company size, and industry data. A strong recommended credit limit benefit companies in need of financing.
Helps build business credit scores and indexes.
Without vendors and creditors there would be nothing on a business credit profile. This would leave the viewer no choice but to use their imagination regarding the company’s payment patterns, activity, and ability to take on new accounts, partnerships, and credit. Like personal credit, when there is limited or no history of payment patterns the risk skyrockets. Future predictions would be negative, and a company stands to lose needed capital as well as future accounts and partnerships.
Helps to maintain available funds.
Your cash-flow will benefit from net-payment terms. It offers time to satisfy your bills while collecting on receivables and managing fixed expenses. The more choices a company has for financial support the better opportunity to keep the company in good standing during slow periods or if they take on a large client that pays receivables after 90 days or more.
Helps build your financial reputation.
Business credit profiles need to be built up and improved to reflect the best vendor and creditor experience, allowing those viewing it to extend as much credit as the company needs.
Helps keep your personal credit and finances separate from business expenses.
When you can gain approvals through your business it allows you to separate your personal credit from the company. Most people have personal and business goals. Many business owners use their personal credit to purchase equipment, make business purchases on personal credit cards, and apply for personal loans and lines to help the business. This can have a detrimental impact on personal financing the business owner might need since all the debt on personal credit will be considered when applying for a loan and credit scores drop based on balance-to-limit ratios.
Establishing vendor credit
The company must be a legal business entity first and have a tax id. Once that exists, start to build your business credit profiles using vendor accounts by working with suppliers who report payment history. The tricky part is finding vendors that report to the business credit bureaus. The three major business credit bureaus are Dun & Bradstreet, Experian, and Equifax. For Dun & Bradstreet to generate your Paydex score, you need to have at least 3 vendors reporting. Experian and Equifax require 1 or 2 vendor/creditor accounts to generate a score. It is essential to build up a good number of creditors and vendors, this will ensure you have a full credit portfolio and reflect a vibrant company. If you only have the minimum number of vendors reporting and one falls off, the profile will be bare again and company scores will be lost.
Tips for picking vendors
Make sure to research the vendor before deciding to work with them. The right department should be able to tell you who they report to and how often they report. Keep in mind – vendors do periodically change the bureau they report to. This can be a time consuming process.
Young companies should ask about qualifying for net payment accounts. Some vendors have programs for companies who do not have a lot of credit history. They might ask for a personal guarantee but only report positive information to the business bureaus or they may ask you to pay on receipt for the first few orders before offering terms. This can be a good starting point for businesses looking to establish their credit. Just be careful when offering a personal guarantee, any negative information will report to both business and personal credit reports.
Most business owners and operators are busy building and maintaining the company and do not want to do all this research. We have Concierge and Do-It-Yourself programs to help you navigate vendor credit building.
Good Vendor Habits
Business credit should be managed as carefully and thoughtfully as personal credit. Paying late and carrying too high of a balance can have a huge impact on immature and seasoned profiles. Make sure to build good credit history. If young profiles only have a few tradelines and they are reporting negatively, it will significantly hurt scores and indexes.
A common misconception is that you need to spend a lot to build credit. Companies do not need to make large purchases to build scores. In fact, you should make sure to stay within your means. For instance, just because you qualify for a $10,000 line of credit does not mean you can afford to use the whole line. Just by placing orders and paying on time you will build credit, the amount you spend has no impact.