Once you've properly established your company as a credible business and setup your profiles with the business credit bureaus, now it's time to start applying for vendor trade lines. Vendor trade lines are critical to the overall strength of your business credit and can make the difference between getting approved or being denied when it comes to applying for business financing. Properly establishing vendor trade accounts will have a positive effect on the rates and terms you receive on business financing as well.
What is a Vendor Trade Line?
When a business vendor offers another business a line of credit, these are known as business or vendor trade lines.
Typically vendor trade lines offer "Net" terms which means you must pay for goods or services within a specified period of time, normally 30, 60 or 90 days. You've probably heard the term "Net 30" which simply requires a vendor account to be paid in full within 30 days. Once you've paid an account in full, it usually takes 30 to 60 days (depending on your billing cycle) for the vendor to report your account limit and payment history to the business credit bureaus.
Although it's important to wait until you receive your invoice before making a payment (this will ensure your payment is properly reported), consistently making payments before the due date will help boost your business credit score even more.
Do I Really Need Business Credit?
Some business business owners don't understand the importance of business credit when it comes to securing business financing. For example, there are several business credit card companies that will approve a business for credit cards with no personal guarantee if the business has established 10 vendor trade lines and at least one line has a $10,000 high credit limit. These national retailers will typically issue business credit cards that can be used anywhere Visa or MasterCard are accepted.
On the other hand, there are business owners that make the mistake of thinking they must first establish business credit before they can apply for business financing. The truth is there are several alternative business funding solutions available to businesses with good revenue, collateral, or principals with strong personal credit.
That said, retail giant Walmart has over 500 trade lines on their business credit profile, and over eighty percent of them are vendor trade lines. If a multinational retail corporation believes in using vendor trade lines, this gives us an important clue as to their significance as it relates to building strong business credit.
Bottom line, the primary reason for establishing business credit is to provide a means of securing greater amounts of low interest business financing, while reducing the business owners personal liability.
A Few Housekeeping Tips
Now before applying for vendor trade lines, here are a couple of housekeeping tips to make sure you have the best chance to get approved for the trade accounts you need to build your business credit:
1. Make sure that all of your business contact information is accurate with the business credit bureaus. Any inaccurate information may cause you to be denied when applying for vendor trade lines or may prevent your positive payment history from being reported on your business credit reports.
2. Ensure that any creditors that may already be reporting on your business credit are reporting a positive payment history. Any delinquent payments will make it almost impossible to get approved for new vendor trade lines.
3. Before applying for vendor trade lines, find out whether the vendor will report your account to one or all of the business credit bureaus. Unlike the consumer credit agencies, most business vendors don't report to the business credit bureaus which may hinder the business credit building process.
Applying for Vendor Trade Lines
Many clients often ask which vendor trade accounts they should apply for. Although the answer isn't always black and white, we've categorized our list of vendor trade accounts based on industry type (i.e. office supplies, computer equipment, industrial supplies, etc.). We've also outlined each vendors approval requirements so that you only apply with vendors you're most likely to be approved with. We also list the business credit bureaus that each vendor reports to, which helps us develop a balanced business credit building strategy that meets your overall funding objectives. A good rule of thumb when it comes to selecting vendor accounts, when possible, apply for vendor credit lines that your business can actually use to free up cash flow.
When applying for vendor trade lines, most vendors will require a personal guarantee on their application. I strongly recommend not providing your social security number on any vendor trade application, even if requested. Simply leave that section of the application blank. If your application is denied, it's probably because there was something filled out incorrectly or the vendor needs clarity on the information provided, but we seldom need to provide personal information for these accounts to be approved.
Some vendors may also require that your business generates $2 million dollars per year in gross sales to apply. This may be intimidating and cause you not to apply with certain vendors at first. Regardless of this vendor requirement, we've consistently seen our clients get approved without meeting these gross sales requirements. Remember, you can be approved as long as you meet the underwriting guidelines based on the business credit you have established.
Once you've completed and submitted your application, you simply need to wait for an approval. When you receive your approval, it's important that you make a purchase on the account as soon as possible which will generate an invoice. Upon receipt of the invoice, make payment immediately (preferably before the due date). Again, establishing the habit of making early payments will give you a stronger business credit rating over time.
Continue to apply for relevant vendor trade lines until you have a minimum of 5 payment experiences reporting to the business credit reporting agencies. This is the minimum number of reporting vendor trade lines required by many of national retailers and credit companies that provide business credit cards and charge accounts.
Now that you've established several vendor trade lines, you are well on your way to qualifying for higher limit credit cards, lines of credit and business loans. Continue to monitor and manage your business credit by making timely payments (early payments whenever possible). Remember to exercise your vendor trade lines by using them to free up cash flow and build your business. Lastly, never provide a personal guarantee for vendor trade lines unless absolutely necessary.
About the Author
Kylon J. Trower is 20+ year serial entrepreneur with a background in residential and commercial lending, business credit development and financing. Most recently, he's built a national network of financial professionals dedicated to preserving the lifeblood of our economy, the American small business sector.
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