By Levi King
It’s no exaggeration to say that the struggles of small businesses—and questions of financing, in particular—have occupied my thoughts day and night throughout the entirety of my entrepreneurial career.
Especially in the early days, those thoughts were the furthest thing possible from theoretical. If I had to describe them in two words, I might choose “practically ignorant.” I didn’t know the first thing about the subject; all I was sure of was that when I needed financing, I needed it now.
Now that I’m in a position where theorizing about small business concerns contributes greatly to my quest to find solutions, I look back on the day when a certain person opened my eyes to the realities of financing.
This person was about as ordinary a guy as you’ll ever hope to meet: a vendor in small town Idaho. I was in my early twenties at the time. I’d opened an electric sign repair business and was working my butt off to keep it going. The first time I met him, I wrote him a check for some supplies. He didn’t know me from Adam, and I’ll never forget his face as he looked at the check I’d handed him and then back at me.
“I hope this doesn’t bounce,” he said solemnly, throwing it down on his desk with dramatic flair. After a moment of silence, he whistled. “Well, look at that.”
I stood there quizzically.
“It didn’t bounce,” he explained—at which I burst out laughing. It’s an old and corny joke, but I was young and—despite all my cares —lighthearted. Needless to say, he made a good impression, and over the following months I returned to him time and again to write more checks.
One day, as I handed him yet another check, he made a proposal. “It’s kind of a pain to cash all these checks,” he said. “Why don’t I just check your business credit, and whenever I see you again I’ll give you net 30.”
I agreed to his generous proposal, but the next time I saw him he informed me that I didn’t have any business credit. I informed him in turn that I didn’t know what he was talking about. I’d never had a credit card in my life, had never taken out a loan; I was completely clueless about what is arguably the most important tool small business owners have at their disposal.
My kind supplier then made a relationship-based decision—one that changed my life. Based on the fact that I seemed to be a hardworking whippersnapper, and so far all my checks had cleared the bank, he decided to extend me net 30 regardless of my lack of credit history. If I kept repaying him on time, he’d report my good behavior to the business credit bureaus, and I’d be on my way to creating the kind of credit score that means sweating blood over financing is a thing of the past.
Suppliers can play a crucial role in helping small businesses access funding, which is essential for growth and sustainability. This support can come in various forms, including trade credit, supply chain finance, and supplier financing. Understanding these options can help small businesses navigate financial challenges and capitalize on opportunities.
How Suppliers and Vendors Can Help Small Businesses Access Financing
Trade Credit
Trade credit is a common method through which suppliers help small businesses manage cash flow. It allows companies to purchase goods or services without immediate payment, providing a grace period before the invoice is due. This grace period can range from 30 days to six months, depending on the supplier’s terms and the business’s creditworthiness. By using trade credit effectively, small businesses can delay cash outlays, thereby conserving working capital for other essential expenses or investments.
As I advanced from fixing to manufacturing electric signs, trade credit meant the difference between failure and success. The idea of floating material costs for months during the much more expensive manufacturing and installation process would have been crushing.
However, securing favorable trade credit terms often requires a good credit history. New businesses or those with poor credit may find it challenging to secure extended payment terms. Once a business establishes a reliable payment track record, suppliers are more likely to offer better terms, which can significantly improve cash flow management.
Supply Chain Finance
Supply chain finance (SCF) is another powerful tool that connects buyers, suppliers, and financial institutions to optimize cash flow. It primarily involves two main strategies: reverse factoring and dynamic discounting. Reverse factoring allows suppliers to receive early payment on invoices at a small discount, based on the buyer’s creditworthiness. This approach benefits both parties: suppliers receive immediate cash, while buyers can extend their payment terms without affecting their suppliers’ cash flow.
Dynamic discounting involves the buyer offering suppliers an early payment in exchange for a discount on the invoice amount. The discount rate is typically adjusted based on how quickly the payment is made. Both methods enhance the financial stability of the supply chain by providing suppliers with timely payments and allowing buyers to manage their working capital more effectively.
Supplier Financing
Supplier financing is a specialized form of funding that helps suppliers meet their financial obligations, particularly when they need to purchase raw materials or finished goods to fulfill large orders. This method involves a financial institution acting as an intermediary between the supplier and the buyer. The financier pays the supplier upfront, allowing them to cover production costs, while the buyer repays the financier at a later date.
Supplier financing is particularly beneficial for manufacturing companies and distributors that need to stock up on inventory or fulfill large orders. It provides them with the necessary funds to meet demand without depleting their cash reserves. However, this option typically requires a minimum level of annual revenue and a good credit history.
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Benefits and Challenges of Using Suppliers and Vendors for Funding
Using suppliers to help fund a small business offers several benefits:
- Cash flow management. By leveraging trade credit and supply chain finance, small businesses can manage their cash flow more effectively. This allows them to allocate resources to strategic investments or operational needs rather than tying them up in inventory purchases.
- Reduced debt. Supply chain finance solutions like reverse factoring do not add to a company’s debt burden, as they are based on the buyer’s accounts payable rather than a loan. This makes them an attractive alternative to traditional debt financing.
- Improved supplier relationships. Working closely with suppliers through these financing options can strengthen business relationships. Suppliers are more likely to offer favorable terms or priority service to customers who demonstrate reliability and growth potential.
- Flexibility. Supply chain financing options provide flexibility in managing working capital. Businesses can choose when to use these options, allowing them to adapt quickly to changing market conditions or unexpected expenses.
While leveraging suppliers for funding can be beneficial, there are challenges and considerations to keep in mind:
- Creditworthiness. Access to favorable trade credit terms and supply chain finance often depends on a business’s credit history. New or struggling businesses may face difficulties securing these benefits.
- Fees and discounts. Supply chain finance solutions typically involve fees or discounts, which can impact profit margins. Businesses must weigh these costs against the benefits of improved cash flow and supplier relationships.
- Complexity. Implementing supply chain finance solutions can require significant administrative effort and technological integration. Small businesses may need to invest in systems or personnel to manage these processes efficiently.
Suppliers and Vendors: The Best-Kept Secret of Small Business Financing
Trust me when I say that suppliers can be a vital source of funding for small businesses through various financial arrangements. By understanding and leveraging these options, businesses can enhance their financial resilience, improve relationships with suppliers, and create opportunities for growth and expansion.
While there are challenges to consider, the benefits of these financing strategies can be substantial for businesses navigating the complexities of cash flow management and supply chain optimization.
Levi King is CEO, co-founder, and chairman of Nav.com. A lifelong entrepreneur and small business advocate, Levi has dedicated over ten years of his professional career to increasing business credit transparency for small businesses. After starting and selling several successful companies, he founded Nav both to help small business owners build their credit health and to provide them with powerful tools to make their financing dreams a reality.
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