I recently read an article about eSys, a technology hardware manufacturing company. Founded in 2000, eSys saw revenues grow from $0 to $2 billion in 5 years. eSys had 112 offices in 33 countries, had acquired and turned around 12 money-losing businesses and had an astonishing $0 in long-term debt. So how do you grow a business, almost over night, from $0 to $2 billion in sales, without taking on any long-term debt? In eSys’ case one of the keys was vendor credit.

Vendor credit can be defined as buying something now and paying for it later or in installments. Unlike a bank line of credit or long-term debt, vendor credit is free or almost free. There generally is a cost associated with vendor credit, although it is implicit rather than explicit. By taking advantage of vendor credit you will likely forfeit any up-front discounts associated with paying a vendor early, usually 1 to 2 percent of the purchase price. However, if you want to lengthen your average payment cycle thus increasing your cash flow and growing your business, this implicit cost is well worth the price.

If you produce ice cream, you may ask the dairy that provides you with cream to extend your payment period. For example rather than paying for the cream within 30 days of invoice, you may ask the dairy to allow you to pay for the cream in 60 days. This is an example of taking advantage of vendor credit to lengthen your average payment cycle, to increase your cash flow and to grow your business.

So how do you go about convincing your vendors to extend you vendor credit? I have a few ideas:

-You have to ask! It is possible that if your vendors are not doing business in a competitive environment, that they will not come forward with the suggestion that you take advantage of credit they may be willing to extend. If this is the case, you will have to ask them to extend vendor credit to you.

-If you are a newly established business, you may need to convince your suppliers that you are credit worthy. That’s right, just like you have to sell your products or services to your customers, you may have to sell your business plan to suppliers. Take seriously the opportunity to sell your plan, be prepared to answer tough questions and show sincerity in your desire to be successful. If you are an established customer and have been loyal to your supplier, this sell should be much easier.

-Along with selling your business plan, help your suppliers to understand your potential success. Make a special effort to draw a connection between your success and theirs. You should also emphasis your interest in remaining a loyal customer for the long-haul. It is likely that a supplier will weigh the short-term risk, selling small amounts of product on credit now, versus the long-term benefit of huge sales in the future.

-Offer to personally guarantee some of the purchase price of your initial inventory purchase. Although this may be a bit scary, it may be necessary to initially convince suppliers that you are worth the risk.

-Buy insurance on whatever you owe your suppliers and name them as the beneficiaries. The cost of such insurance would be a fraction of the cost of conventional bank borrowing.

-Shop around! Visit with two or three suppliers about the potential of purchasing on credit. If your suppliers are in a competitive environment they will be more likely to sell on credit just to get or keep your business.

In summary, remember two things. First, in the business world “cash is king” - by using vendor credit you can conserve more of your own cash for growth. Second, using other people’s money, is always better than using your own.

Richard Zollinger is a finance manager at American Express.

This entry was posted on Thursday, April 19th, 2007 at 4:15 pm and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.