Many entrepreneurs don't start thinking about establishing trade credit until they hit a cash flow crunch, but you may actually be able to use it to meet part of your startup funding requirements.
In retail or wholesale businesses, the cost of your initial inventory is typically one of the largest expenses. In a manufacturing business, the cost of your raw materials is typically pretty high on the list. By using trade credit, you may be able to sell your products, or at least a portion of them, before you have to pay your suppliers.
Obviously this works best in businesses with a fairly fast manufacturing cycle or inventory turnover, but if that describes your business, this approach may help significantly reduce your capital requirements.
Using trade credit when you're first starting out does a couple of things for you:
- First, it reduces the need to use personal property and funds as collateral, which a bank will typically require when financing an early-stage startup.
- Second, it will help establish a credit rating for your business, which will make it easier to get a loan and may even get you a better rate when you do need bank financing.
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