Banks are stupid; they will lend you money when you’ve got plenty of it and refuse you a loan when you really need it, because you’ve run out of cash. But banks are businesses and they want to be paid back, with interest. If you can’t pay them back, that’s bad business for them and tough for you.
What every business needs is to create lines of credit with their suppliers. Your business is no exception. So you get to the position where a supplier delivers their products or services to you and you pay them on agreed trading terms, which could be 5, 10, 30 days or more after delivery. When you start your business it doesn’t really matter what those terms are – anything is fine just to get started. And so your start developing your credit profile.
The golden rule is to agree the terms of payment and then pay your supplier exactly on that day. Not a day earlier or later. I review my payables list regularly so it's clear when I need to pay each supplier. I always make a note in my calendar when a payment becomes due and I send an email saying that I’ve just paid an invoice so the supplier knows I’ve got my accounts under control.
What you’re doing by paying exactly on the due date is establishing trust, and over time, as that trust grows, you’ll establish a perfect trading record. Go for the small suppliers first, and then get them to write you a trading reference, which you can show to larger suppliers to get credit from them. It’s a lot of work, but absolutely worth it.
Any supplier that gives you credit is taking a risk – a risk of non-payment. They accept that risk by allowing you to pay later. By showing your supplier that they can trust you to pay on time, you will open up more opportunities to increase their sales to you and give you yet more generous terms – and both of your businesses will grow. Use your trading record with them to negotiate the best possible credit terms.
Rather than going to the bank for a loan to grow your business, if you’ve established trading terms, your supplier will fund it and your working capital requirements will be less.
That’s good business for both of you.
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