Using Business Credit the Right Way

Using business credit can be an invaluable resource for both new and established companies, especially those that may have experienced external distress.

Josh Feinkind, founder of pet product websites The Refined Feline and The Refined Canine, learned to be careful with credit the hard and expensive way. A couple of years ago, he discovered a vendor in Vietnam who he thought could help him cost-effectively manufacture his line of pet furniture items, which includes cat towers and dog beds.

The vendor asked for a $20,000 down payment to start production. But a month later, before a single piece of furniture was delivered, the vendor went out of business. “Losing $20,000 to a Vietnamese supplier was a pretty big hit for a small business like ours,” says Feinkind, who grosses just under $1 million annually in sales. “Suing a company in Vietnam wasn’t really viable, so I quickly realized the funds were lost.”

Feinkind, who also operates under the RefinedKind Pet Products label, vowed to never make the same mistake again. Now, whenever he does business with a new vendor, domestic or foreign, he insists on a letter of credit.

Here’s how it works. Feinkind sends payment to his bank, which holds the funds until products are delivered. Once the products arrive on time and in full, the bank releases payment to the supplier. If the product is not delivered as agreed, the funds are returned to Feinkind.

“It probably costs me about $200 to draw up that letter of credit, but it’s worth every penny,” he says. “It’s like a form of insurance. I don’t want to get burned again, so it helps me avoid a lot of worry.”

Wayne Sanford, founder of credit-consulting company New Start Financial and author of TheReal World of Credit, approves of Feinkind’s meticulous approach. He warns that many businesses are here today and gone tomorrow, which means you must make every effort to protect yourself when doing a deal. “Having a third party hold the money in escrow is an excellent way of ensuring you get what you paid for,” he says.

Clients can also be a cause of anxiety for Feinkind. Many of his customers are individuals who come to his sites to purchase furniture for their pets. A typical sale is between $200 and $400. Feinkind only accepts credit cards, so he usually doesn’t have to worry about payment. But he also deals with a number of large retailers, like Petco and Costco, which feature Feinkind’s products on their websites. When a consumer orders from one of the sites, Feinkind ships the product immediately, but he doesn’t get paid by the retailer for another 30 days. Over the course of those 30 days, he can build up tens of thousands of dollars in accounts receivable.

If it’s Costco that owes him, Feinkind knows he’ll get paid eventually. But recently, in an attempt to grow his business, he’s been allowing a number of mid-size online retailers to carry his products as well. One problem that arises is that these retailers also want net-30 terms. Since many of these relationships are brand new, Feinkind is not sure if he’ll get paid at the end of the term.

“As we get hungrier for more business, we may start considering offering terms to our mid-size customers with a low credit line that can increase over time,” he says. “You have to take a bit of a risk if you want to grow the business. The more reliable these customers become, the more credit I can extend to them.” Using business credit in this way may help produce and grow revenues.

Credit consultant Sanford says the goal should be to minimize risk as much as possible and recommends that retailers like Feinkind negotiate with mid-size businesses to protect themselves. “Maybe for the first 30 days, work out a way to get paid weekly, and then see what happens from there.”

Learning to Use Business Credit the Right Way

Feinkind is looking into using a credit bureau like Dun & Bradstreet to investigate the creditworthiness of potential retail partners. “I’m leaning toward investing in a service that allows me to easily pull credit reports,” he says. “I think it really could be worth the cost.”

As for his own credit rating, Feinkind is always working to build his score. “Good credit has allowed me to open lines of credit, increase lines of credit, and open credit card accounts when needed,” he says. “Since banks look at personal credit scores, it’s important to keep a high personal credit score as well.”

When Feinkind started his business five years ago, getting a line of credit from his bank was a piece of cake. He simply walked in to the bank, provided his tax ID number, and got approved for $60,000 the next day. A year later, he was able to open a second line of credit with another bank for $75,000.

But when the financial crisis hit in 2008, credit became harder to come by, even for established companies like RefinedKind. That meant using business credit, whether that is opening new credit lines or increasing current lines, became far more difficult.

“We were panicking at one point, because we needed inventory but we didn’t have enough credit to manufacture all the products,” Feinkind says. “We had the orders but we couldn’t get the money because banks had suddenly become a lot more stringent.” Feinkind had no choice but to take out a personal loan, then loan the money to his business. Obviously, this is not an ideal way of operating.

“Everyone is talking about how we need to give more money to small businesses but, as an owner myself, I can tell you we’re just not seeing it,” says a then frustrated Feinkind. “The bottom line is that every business needs credit to survive.”

Employing various lines of credit can be an integral part of running your business. Sanford’s advice for those who currently aren't using business credit, but are interested in doing so, is to start knocking on the doors of smaller banks and local credit unions. At big banks, a business owner like Feinkind may be just a number. But at smaller banks, Sanford says, an owner is still a real person. Smaller banks will sit down and discuss details with business owners and look favorably on those who can demonstrate demand for their products.