If you’ve been in business for awhile, you know that getting the funds to ignite your killer idea is just the beginning. Once the dust settles, the day-to-day challenges of running a business take center stage. Dealing with cash flow issues usually tops the list.
At some point, you’ll probably find yourself in a situation where you simply don’t have the cash to pay all your bills. This is normal. I spent many sleepless nights in my early days figuring out how I’d make payroll that month.
Eventually, I discovered a simple trick that made managing cash flow a lot easier: leveraging trade credit.
Decoding trade credit
Also known as business credit, trade credit is lines of credit you can obtain from your vendors and suppliers. This lets you defer payment for inventory and services while you wait for cash to come in. Essentially, these credit arrangements are like a short-term, low-cost loan.
Trade credit is typically extended for about 30 days. But as you pay your bills on time and build a trusted relationship with your suppliers, you can ask to have the terms extended to 45, 60 or even 90 days. Would having an extra 30 days to pay your bills make your life easier?
Most suppliers and vendors are happy to extend you credit because they want to keep you as a customer. If you do well, they do well. Even still, they won’t just blindly front you money.
Know your business credit score
Before offering trade credit, suppliers will check your business credit scores—typically your Dun & Bradstreet PAYDEX score. Think of it like a personal FICO credit score for your business. Suppliers use it to get a quick snapshot about how timely you are paying your bills. The higher your score is, the better.
Let’s look at how the PAYDEX score works and how you can boost your score to get more time to pay your bills.
How the PAYDEX score works
In order to create a PAYDEX score for your business, Dun & Bradstreet requires that you have at least four trade accounts on file. Having this amount of payment history on file ensures they can produce an accurate score.
To start, I’d check to see what’s in your D&B file. If you don’t have the four accounts, you can manually add them. Think about businesses you work with everyday: Staples, UPS, Home Depot, etc. Most are willing to extend a small amount of credit if you ask.
And, good news: When calculating the PAYDEX score, D&B doesn’t care about how much credit you have available. $500 or $50,000—it doesn’t matter. Your payment behavior is the only factor that impacts your score.
How to boost your PAYDEX score
To get a perfect “100” PAYDEX score, you have to pay your bills 30 days before they’re due. But, I wouldn’t worry too much about achieving a perfect score. Aim to keep it in the 80 to 100 range.
Here are some tips to keep your score high:
Always pay your bills on time or early.
Use electronic funds transfer to make payments. This method also helps you hang onto cash longer, while making sure your vendors get paid quickly.
Openly communicate with your suppliers. If you ever need to delay a payment, be up front.
As your score rises and you build trust with your suppliers, don’t be afraid to ask for longer payment terms and inquire about discounts for early payments.
Then, stay on top of your business credit score. Suppliers will regularly check it to make sure your company isn’t “slipping.” If your score starts to make you look less creditworthy, they can change your payment terms without notice.
OnDeck and Creditera have teamed up to make it easy for you to access and monitor your business credit. Click here to see your business credit data for free.
Get free access to Creditera’s business credit tools.
About the Author:
Levi King is the co-founder and CEO of Creditera, a free service that gives business owners access to their business credit data and helps them leverage it. King has started and run multiple successful businesses. During this time, he worked to overcome the same issues faced by most small business owners: access to capital and marketplace credibility. His expertise in this area ultimately led him to start Creditera.
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