Using a Card, Not a Vendor Credit Line, for Business Purchases

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Getting credit terms (aka trade terms) with vendors is usually a savvy move but, depending on the circumstances, paying with credit or charge cards can be just as smart. Securing trade credit, which typically requires disclosing financial information, may not always be in your best interest. Consider all of your payment options before signing a credit application.

Sales representatives may really push the credit application as a way of establishing a new account and, then, hopefully growing the business. Credit fuels sales growth, which may be beneficial to the vendor but problematic for your company. The vendor will often gather lots of information on customers in an effort to manage risk, minimize bad debt, and, if needed, recover losses associated with delinquent accounts.

What information might be requested by vendors on a credit application?

• Number of years you’ve been in business
• Bank references
• Trade references
• Business financial statements, including profit & loss statements, balance sheets, and cash flow statements
• Personal financial statements

Vendors’ credit staff will use this information, conversations with bank and trade references and third-party credit reports (e.g., Dun & Bradstreet), to gain understanding of your overall financial position and creditworthiness. Reviews of credit status should occur at least once every year, requiring you to present financial statements on an annual basis. And, dialogue with references will likely occur on an ongoing basis, not just when the credit account is established. These discussions will center on your financial solvency, debt owed to other vendors, average number of days outstanding on invoices, and more.

Considering the loss of financial privacy associated with trade credit, you might choose to forgo filling out a credit application under some circumstances, such as:

1. First purchase from a new vendor. You may be placing an order to test the capabilities of a new vendor. At this point, it is unclear whether your company will be using this vendor on a long-term basis. Getting entangled in a credit agreement may make it more difficult to break an unsatisfying relationship.

2. Small purchases. Having to manage credit relationships with lots of vendors may cause more administrative work than it's worth.

3. Infrequent or seasonal purchases. Your business may be making some once-a-year or twice-a-year purchases that may not be worth the trouble to establish and maintain credit.

4. Credit terms that are less than NET 30. One of the biggest reasons that you’ll want to establish a trade account with a vendor is to get terms that are more favorable than other options. If the trade terms are the same as or less favorable than charge or credit cards, then the benefit of trade credit is nonexistent or greatly diminished.

5. Start-up period. Many vendors require a minimum number of years in business before giving terms. Find out if your company meets basic credit qualifications. If you don’t, skip the application.

6. Credit rebuilding period. If your business has had some rough times, being careful with financial information may be one way to avoid rejection now and get credit approval later.

7. Confidentiality. Strategic vendors will want to have access to certain information in an effort to plan and manage their business operations and assure proper financial standing. But you may not want all vendors to know everything about your cash flow and credit status.

Rather than establishing a credit line with a new vendor, investigate payment alternatives. Charge cards or credit cards give your business and the vendor a chance to evaluate the viability of a relationship before you commit long-term.