Supplier and Merchant-based Credit: Alternative Financing for Businesses
In a challenging economic climate, businesses are increasingly turning to alternative sources of financing. Trade credit and merchant-based lending have emerged as significant options, surpassing traditional bank lending in recent years. This presentation explores these alternative financing methods, their benefits, and how businesses can leverage them for growth and success.
The Rise of Trade Credit
1
2022
Trade credit provides $2.15 trillion in financing for US businesses, surpassing bank lending.
2
2021
Bank lending totals $1.5 trillion, down 6.5% from the previous year.
3
Present
Trade credit becomes the largest source of credit for most companies in the US and Europe.
Types of Trade Credit
1
Franchiser Credit
Franchisers supply goods or credit to franchisees for a set period, ensuring quality and supporting their success.
2
Consignment
Common arrangement with retailers and import businesses, where goods are shipped without upfront payment.
3
Discounts
The most common form of trade credit, offering lower prices for faster repayment or based on quantity of sales.
Common Trade Credit Terms
Merchant-Based Lending
Key Features
Cash-based lending that doesn't rely on credit ratings. Repayment is based on a percentage of daily credit card receipts or sales.
Advantages
No regular fixed payments, no collateral required, and no impact on assets or cash flow. Approval and funding can be quick.
Considerations
Premium charges can be high, up to 30%. Typically repaid within a year.
Types of Revenue-Based Financing
Purchase Order Financing
Funding based on confirmed purchase orders from customers
Accounts Receivable Financing
Lending against outstanding invoices
Job Order Financing
Funding for specific projects or contracts
Credit Card Receivables Financing
Lending based on future credit card sales
Some Credit Options:
One excellent source of supplier-based credit is Behalf. Behalf offers net-terms financing, allowing you to pay for inventory and other business expenses over time rather than upfront. The application process is quick and simple, and Behalf can provide credit limits up to $50,000 based on your business's sales volume and creditworthiness.
Another supplier-based credit option is Net30, which offers net-30 payment terms with no interest or fees. Net30 evaluates your business's creditworthiness and payment history to determine credit limits, which can reach up to $150,000. Qualifying for Net30 can also help strengthen your relationships with suppliers by demonstrating your ability to pay invoices on time.
Assessing Your Financing Needs
1
Identify Capital Needs
Understand your company's specific capital requirements, including short-term, long-term, working capital, and inventory needs.
2
Match Loan Requests
Align your financing requests with specific business needs to ensure efficient repayment and growth.
3
Evaluate Cash Conversion Cycle
Calculate your Cash Conversion Cycle (CCC) to determine if you can finance your business entirely based on cash flow.
More Resources
Another option is merchant cash advances from providers like Fundbox and OnDeck Capital. These lenders provide upfront cash in exchange for a percentage of your future credit card or debit card sales. Approval is often faster than traditional bank loans, making merchant cash advances a good choice for short-term financing needs.
Kabbage is another provider of merchant-based credit, offering lines of credit up to $250,000 based on your business's online sales data and other performance metrics. The application process is entirely digital, and you can access funds within a matter of days.
Final Thoughts:
To qualify for supplier or merchant-based credit, you'll typically need to provide financial statements, bank statements, and information about your business's sales volume and industry. A strong credit history and positive cash flow are also important factors that lenders will consider. While these financing options can be extremely helpful for small businesses, it's important to carefully review the terms and fees associated with each provider to ensure you're getting the best deal. Additionally, maintaining a good relationship with your suppliers and processing a high volume of credit/debit card transactions can improve your chances of approval and favorable terms.
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