Vendor Financing for Small Business

Bank financing in the form of lines of credit and term-loans are sometimes difficult to obtain for small business. The reasons for denial are varied, but they usually center around the lack of a proven ability to service debt or character. Most bank lenders are hesitant to lend to small business when the following is present:

a)      A brand new business startup without historical financial performance to back up projections.

b)      An owner whose personal income is solely dependent on the small business, but once you combine the business and personal cash flow the debt service coverage is insufficient. For small businesses, the debt service testing will be centered on the global cash flow.

c)      The business owner has terrible personal credit, or to a lesser extent the business has bad business credit. Your personal credit is important because most if not all bank lenders will require a personal guaranty.

If you happen to be in one of these situations, there might still be opportunities where you can use credit to finance some of your business needs by using vendor financing. Not as flexible as a bank loan, which provides you with actual cash to cover your basic business needs {meeting payroll, paying suppliers, buying inventory, purchasing equipment, etc} vendor financing can still be a useful tool to obtain a variety of business supplies and equipment.

Let’s define vendor financing: The definition of vendor financing is simple. Most businesses primary function is the sale of goods and services. In the process of selling those goods and services, these businesses or {vendors} have found it necessary to provide credit terms to the buyers. Either because of competitive pressures or to stimulate consumption of the goods and services that they sell.

Who underwrites these vendor lines? Well that depends on the vendor. Some small vendors have one or two employees in charge of reviewing the applications for credit. Others use specialized software, and most of the large ones have actually outsourced the underwriting to financial institutions. I know from personal experience that the largest office supply stores such as Staples outsource to Citibank the approval process.

What is the primary underwriting criteria for these credit lines? Most vendors rely on business credit reports to approve customers, and to a lesser extent some will perform their own due diligence by checking up with trade references and banks where the businesses have their depository relationships.

Who are the credit reporting agencies? For businesses there are three players. Dun & Bradstreet, Experian, and Equifax.  Dun & Bradstreet is the oldest business credit reporting company, but Experian business credit reports have been taking a lot of their market share with aggressive marketing and what I believe to be a better product. From what I have seen, Equifax is a minor player in this area.

What is contained in these reports? These reports contain basic business information gathered from public sources {incorporation data, address, telephone,  judgments, UCC filings, etc} as well as trade payment data, and a credit score.

How does a Small Business gets rated and reported by these agencies? The process is designed to be automatic with the information being collected by the agencies in a similar manner to the way that personal credit information is collected. However, there are ways that can help a business establish and improve business credit. Some of these are:

1)      Your business can request a DUNS number from Dun & Bradstreet if it does not have one already. Please note that Dun & Bradstreet is notorious for hard selling their services to the small business owner as a shortcut to complete the credit file. I personally do not think that this is necessary, and in the cases of newly established companies with little credit it might be a waste of money as there will be nothing to report. However, you can always use their services if time is of the essence in your situation.

2)      There are ways to bulk up the business credit file. The more trade lines reporting the better. You can do that by applying for credit on behalf of your business to several vendors and buying small amounts of goods so that the experience is reported.

3)      You can learn more about this subject by visiting other sites. I recommend creditboards.com / business forum as a good source for additional information on setting up and improving your score.

In conclusion, is there a benefit to increasing my vendor financing availability? As mentioned earlier, vendor financing will not help you make payroll. However, there is quite a lot that can be bought on terms from vendors without having to provide a personal guaranty.

For additional information on this subject, you can buy the following books from Amazon Principles of Building Business Credit or Unlimited Business Financing: Learn How To Obtain $250,000 Or More In Business Funding Without Harming Your Personal Credit

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