It’s about managing riskSupplier credit is a commonly used method of managing cash-flow. The idea is that the supplies are purchased on credit, work is completed and sold to clients and the supplier is paid at the end of the month. The trick is to manage the work-flow so that payment from clients is received before you need to pay the supplier.
Spreading the riskIf your business’ product or service is dependent on goods from a supplier before it can be delivered to clients, then it will be really important to make sure that you have more than one supplier of the critical goods. That way, if something happens to your primary supply source, you have a backup supply available and can avoid a negative impact on your business.
What suppliers expect from youNo business is going to risk letting you take goods on a promise to pay if they have doubts about your intention or ability to pay them. So, suppliers expect you to prove to them that you have a good credit history and that your business is sustainable.
Applications for supplier credit vary according to the size of the supplier company. Large companies usually have very stringent criteria and they are not prepared to negotiate or waive any of their requests for information.
Smaller suppliers, that are owner managed, may be open to negotiation and prepared to listen to your requests.
However, you can expect all suppliers to at least request the following information:
- Company founding documents.
- Permission to conduct a credit check on the business and the business owners.
- Annual financial statements for the previous year.
- Management accounts for the current year.
- Trade references.
Preparing for supplier credit
Although applications for supplier accounts are generally no more than one or two pages, there is a fair amount of documentation for you to collect before you can submit the form.
This includes the following:
- Certified copies of the company founding documents.
- Certified copies of the IDs of all business owners.
- Personal asset and liability statements of all business owners/directors.
- Tax clearance and VAT registration details.
- Financial statements for the past year.
- Banking details.
- Trade references.
Other things suppliers look forThe supplier looks for signs of controlled growth, good financial management and sound business practices. These can be found in your financial statements, your bank statements, trade references, credit checks and professional references.
Lastly, suppliers want to be sure that they have some recourse in the event that you don’t pay your account, so they’ll look to you as an individual to get their money back. You may be expected to sign personal surety and that’s not always enough. A supplier may also want to see that you actually have some assets that can be liquidated in case of default, hence the occasional request to see the assets and liabilities statements of the business owners.
Tips for overcoming common challengesFirstly, suppliers aren't expecting you to produce a perfect application. But, you still need to put your best foot forward. One suggestion to increase your chances of receiving credit is to meet with the management (the higher up in management, the better) of the supplier to make a full business case for your application.
Here are some of the areas you should look at and consider to strengthen your application:
Overcoming a lack of trade referencesIf you are just starting out, perhaps consider including your CV which outlines your strong management capabilities. A business plan will also help if you are lacking trade references.
If you have thus far only dealt in cash, document your track record through bank statements, financial statements and cash slips (for goods bought from suppliers).
If you have a good payment record for accounts that are in your personal name, then consider using these to show yourself as an honest person who honours their account commitments.
Bad credit recordGive an open and honest explanation of your credit troubles. Present your plan of how you are currently paying off debt. People are impressed only by actions towards resolving the problem, so telling them that you intend to pay it off when no payments have been made as yet, will not make a good impression.
Needing a higher credit amountIf you are requesting an amount that is not in line with your current turnover, you will be expected to explain why this is the case. If the need is related to a contract or tender, then provide a certified copy of this to the supplier who may be prepared to extend the credit limit for the duration of the contract.
If the request for a higher credit limit is linked to growth plans you want to put in place, then share these plans with your supplier.
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