Understanding Business-to-Business Lines of Credit
When businesses offer other businesses lines of credit, these are what is known as business trade lines.
Rather than taking out a traditional line of credit from a bank, and using that cash to purchase inventory or other types of goods or services, a business owner can open up business trade lines with their vendors.
This way, they can get the products and services they need, while still having the flexibility of paying the vendors 30, 60, or 90 days after receipt of the invoice.
By paying on terms, the business has the opportunity and time to sell the inventory in order to pay the vendor using revenue collected from sales, rather than having to use the business’s cash reserves.
How to Establish Business Trade Lines
Establishing business trade lines with other businesses is similar to applying for a line of credit at the bank. The business extending credit will normally check the credit profile of the business that is applying, and in some cases, the owner’s personal credit may also be checked.
If the creditor feels confident that the applicant is a low-enough risk, then he will grant the applicant a determined line of credit. While the process is very similar, being approved for a business trade line is more likely for a newer business, over being approved for a bank line of credit.
Do Trade Lines Affect a Business’s Credit Score?
If your business has a trade line with a vendor, and you have been faithfully paying your invoices on time since its origination, then your trade line will have a positive impact on your business’s credit rating.
This of course depends on whether or not the vendor has been making regular reports to business credit reporting bureaus like Dun & Bradstreet.
Not all vendors report to the credit bureaus, so if you want your trade line to help increase your credit rating, then you need to make sure the vendor you choose does. If you discover that they currently do not, you can ask them to report your payments going forward.
In the event that a vendor still does not want to be bothered with reporting payments to the credit bureaus, then you can either find another vendor that will, or file your company’s trade line payments to Dun & Bradstreet directly.
What Is a Seasoned Trade Line?
Some companies have started selling “seasoned” trade lines online as a means for new businesses with little to no credit (or businesses with poor credit) to piggyback their companies onto the account of an aged trade line in order to help improve their credit ratings.
While this is not currently illegal, it is risky for the businesses involved. According to some experts, piggybacking on the seasoned trade line of another business is not only expensive, but it can also cause some business owners with poor credit management skills to find themselves even deeper in trouble by taking on more credit than they can handle.
Rather than try and build your business’s credit by piggybacking on a seasoned trade line, it is less expensive and more effective for your business to work on building its own credit through proper credit management and timely growth.