By Dean Kaplan, CEO and President, The Kaplan Group 

A common hurdle for small to mid-size organizations is finding the capital needed to fuel growth. A well-timed infusion of funds can help any business bloom, but many aren’t in a position to borrow at favorable rates, especially in their first few years of operation.

If you’re facing this dilemma right now, you may benefit from learning more about trade credit — a tool that is often overlooked as a way to reduce costs and support healthy business growth.

A look at how trade credit works

In seeking out trade credit, you are hunting for providers of goods and services who will accept payment over time at zero interest. Essentially, we’re talking about a short-term B2B loan made by the seller with anywhere from 30 days to 12 months to pay. 

Let’s say you are a homebuilder hoping to build a stunning residence in a desirable location — a true showcase of your talents. Unless you have a client already lined up, you may feel your only option is to build the home and market it after completion.

Finding materials suppliers that will offer you trade credit is one way to get your project off the ground while maintaining stronger cash flow. Of course, your options aren’t limited to hard goods. If you need to upgrade your design software or collaborate with an interior designer, you may be able to find professionals who will provide these services now while accepting fees over time. 

Even if you can’t source all the required materials and services at zero interest, trade credit clearly puts you in a stronger position to build a dream home that not only sells at a solid profit, but also attracts new commissions.

How useful is trade credit in accelerating growth? 

Though the example I’ve given here comes straight from the small business playbook, trade credit is a global phenomenon. The World Trade Organization estimates that 80% to 90% of all world trade is backed by trade credit, trade insurance and related guarantees. Wal-Mart, ranked by Forbes as the world’s largest retailer, actively uses trade credit as part of its overall business strategy.

Scaling this strategy for your own company doesn’t have to be complicated. Begin by considering: 

• Which goods and services are essential to our operations? 
• How much are we spending on them right now? 
• Are we using credit cards or business loan proceeds to cover these expenses? 
• What interest rate(s) are we paying? What was our total interest paid for basic goods and services last year?
• Are there investments we haven’t made — new equipment, a better website, nicer retail displays — because cash flow wouldn’t support them?

Answers to questions like these will help you weigh the advantages of seeking out trade credit.

Preparation steps in obtaining trade credit

The next step is finding suppliers and professionals that will offer you zero-percent financing on purchases or services rendered. Typically, companies that offer trade credit will give you 30, 60, or 90 days to pay, documenting purchases via regular invoice. Sellers of heavy equipment or large-scale business systems may offer 12 to 18 months. 

Identifying suppliers that fit your specific needs can take considerable research and negotiation. Look for organizations that are competing for new customers, since they may offer trade credit on generous terms. 

As with any supplier, you should subject trade credit partners to the same level of scrutiny they will apply to you. Are they well-established — or if new to the market, offering you strong business references? What can you learn from online reviews? Do you trust the quality of what they provide? Will they deliver on time?

While you’re working to pinpoint the best opportunities, gather the information you’ll need for suppliers’ credit applications, including banking information and references. Line up other personal and business references in advance. If you’re working with smaller organizations that may not have a formal application process, put together a credit information document with all the details in one place. This will save time and show your commitment to setting up a trade agreement that satisfies both parties. 

Trade credit can create complexity in accounting, depending on which accounting method is used (cash or accrual). Make sure your financial and accounting team knows about the agreements you sign and integrates these transactions into your accounting workflow.

Should your company offer trade credit? 

So far, we’ve focused on the benefits to buyers. But are there ways your company could grow by offering trade financing to carefully selected customers? 

First, realize that extending trade credit comes with a certain amount of risk (and work). You will need to vet each customer’s creditworthiness and make clear-eyed decisions, adjusting your terms as you learn from your experience. No matter how tightly you word your trade credit agreements or how skillfully you pursue past-due accounts, you will likely suffer some losses. As with all business decisions, it’s a matter of weighing the risks against the potential gains.

One way to encourage on-time payment is to offer discounts when customers pay early. For example, they might get 2% off when they pay within 10 days of a 30-day, no-interest payment period. If your payback period is longer, you can adjust discounts to reflect the benefits you gain when payments arrive ahead of schedule. 

Another option is to work with a fintech company that offers trade credit services for small businesses. These organizations have already set up the application and evaluation systems, saving you time and headaches. They’re also working from massive data sets designed to identify qualified buyers (and weed out bad risks). Weigh all of these advantages against the fees they charge to see if choosing a trade finance partner might be right for you. 

As you consider the costs and risks of offering trade credit, don’t overlook these advantages:

• Building stronger relationships with your clients
• Encouraging customer loyalty
• Gaining a larger share of your customer’s total spend 
• Attracting new customers who are also growing their businesses

Viewing trade credit as part of your overall strategy

Any business decision that requires as much time as this one may give you pause. You may feel you don’t have the data to fully evaluate what trade credit can do for you, whether you’re using it to buy or sell. A brief conversation with your accountant, CFO or business partners can shed light on the topic, getting you past some of the doubts you might feel (and revealing downsides you may not have considered). 

At the end of the day, building healthier revenues and profits will be the deciding factor. Putting trade credit in the mix for 2023 and beyond could be the solution you’re looking for.