Introduction
As a contractor or builder, managing cash flow is one of the biggest challenges you face. Between paying for materials, equipment rentals, and labor costs—often before you see any payments from your clients—things can get tight fast. That’s where trade credit can make all the difference.
Trade credit allows you to delay payments to your suppliers, giving you more time to complete your projects, collect payments from clients, and keep your cash flow healthy. Essentially, it’s like getting a short-term loan directly from your supplier, without the hassle of applying for financing.
At BidM8, we know how critical trade credit can be for builders who need flexibility to stay competitive and take on more work. In this blog, we’ll explain how trade credit works, its benefits, potential risks, and how you can negotiate favorable terms with your suppliers.
How Does Trade Credit Work?
Trade credit is a payment arrangement where a supplier allows you to purchase goods or services now and pay for them later. Instead of paying upfront, you agree to pay within a specific timeframe—known as the payment terms.
Typical Payment Terms
The most common trade credit terms you’ll see are:
- Net 30: You have 30 days from the date of purchase to pay your invoice in full.
- Net 60: You have 60 days to pay.
- Net 90: You have 90 days to pay.
Some suppliers may offer early payment discounts to incentivize faster payment. For example, a 2/10 Net 30 term means you can get a 2% discount if you pay within 10 days, but the full payment is due in 30 days.
How It Works in Practice
- You place an order for materials or supplies with a supplier.
- The supplier delivers the materials and sends you an invoice.
- Instead of paying immediately, you pay the invoice within the agreed-upon timeframe (e.g., 30 days).
By delaying payment, you free up cash to cover other expenses, like payroll or unexpected project costs.
Benefits of Trade Credit for Builders
Trade credit isn’t just about delaying payments—it’s a tool that can significantly improve your cash flow and give your business more flexibility. Here’s why builders and contractors rely on trade credit:
1. Improved Cash Flow
Trade credit allows you to keep cash in your business longer. Instead of using your cash reserves to pay suppliers immediately, you can use that money to cover other pressing expenses, like payroll or equipment rentals.
2. Take On More Projects
When you’re not tied up paying for materials upfront, you can use trade credit to take on more jobs. This is especially valuable if you’re growing your business and need to handle multiple projects at once.
3. No Need for Additional Financing
Unlike loans or lines of credit, trade credit doesn’t require you to go through an application process or pay interest. It’s a simple, no-cost way to access short-term financing through your suppliers.
4. Strengthen Supplier Relationships
When you consistently meet your payment terms, you build trust with your suppliers. This can lead to better deals, more favorable payment terms, or priority service in the future.
5. Opportunity for Early Payment Discounts
If your cash flow allows, taking advantage of early payment discounts (e.g., 2/10 Net 30) can save your business money in the long run.
Risks of Trade Credit
While trade credit offers many benefits, it’s important to understand the risks involved so you can manage it effectively.
1. Late Payment Fees
Failing to pay your invoices on time can result in late payment fees, which can quickly add up and hurt your bottom line.
2. Damaged Supplier Relationships
Suppliers depend on timely payments to run their businesses. If you consistently pay late, you risk damaging your relationship with them, which could result in stricter payment terms or losing access to trade credit altogether.
3. Overreliance on Credit
Using trade credit irresponsibly—such as overextending yourself across multiple suppliers—can lead to cash flow problems down the line. It’s important to balance your credit use with your ability to pay on time.
4. Impact on Future Projects
If a supplier cuts off your trade credit due to late payments, it could delay your access to materials for future projects, impacting your ability to meet deadlines or take on new work.
How to Negotiate Favorable Trade Credit Terms
Trade credit isn’t a one-size-fits-all arrangement. The terms you get depend on your relationship with the supplier, your payment history, and your ability to negotiate. Here’s how to secure favorable terms:
1. Build a Strong Relationship with Your Supplier
Suppliers are more likely to offer trade credit to customers they trust. Communicate openly, pay your invoices on time, and maintain a positive relationship to demonstrate that you’re a reliable partner.
2. Start Small
If you’re new to working with a supplier, they may only offer limited credit at first. Prove your reliability by paying on time, and you’ll likely qualify for higher credit limits or longer payment terms in the future.
3. Ask for Extended Terms
If you’re consistently meeting your payment deadlines, don’t be afraid to ask for better terms. For example, you could negotiate moving from Net 30 to Net 60 or increasing your credit limit to handle larger orders.
4. Leverage Competition
If you have a strong relationship with multiple suppliers, you can use competitive offers to negotiate better terms. Let your supplier know what others are offering and see if they’re willing to match or beat it.
5. Take Advantage of Early Payment Discounts
If your cash flow allows, ask for early payment discounts as part of your trade credit arrangement. This shows you’re proactive and willing to work in a way that benefits both parties.
6. Work with BidM8
At BidM8, we help contractors negotiate trade credit terms that align with their business needs. Whether you’re working with new suppliers or trying to improve terms with existing ones, we can guide you through the process.
Why Choose BidM8 for Trade Credit Guidance?
At BidM8, we’re committed to helping contractors streamline their operations and improve cash flow. Here’s how we can help with trade credit:
- Industry Expertise
We understand the challenges builders face, from cash flow gaps to supplier negotiations. Our experience allows us to provide tailored advice that works in the real world. - Supplier Connections
We’ve built relationships with top suppliers in the construction industry. If you’re looking to establish trade credit, we can connect you with reliable partners. - Negotiation Support
Not sure how to ask for better terms? We’ll help you navigate the conversation and secure a deal that benefits your business. - Comprehensive Solutions
From trade credit to financing options, we offer a range of tools to keep your cash flow steady and your projects moving forward.
Conclusion
Trade credit is more than just a way to delay payments—it’s a powerful tool that can improve your cash flow, help you take on more projects, and grow your business. By understanding how trade credit works and managing it effectively, you can strengthen your supplier relationships and set your business up for long-term success.
At BidM8, we’re here to help you make the most of trade credit. Whether you’re establishing terms with new suppliers or renegotiating with existing ones, we’ll provide the guidance and support you need to secure favorable terms.
Ready to learn more about trade credit? Contact us today at Click Here or fill out our Financial Services Survey to get started.
Let BidM8 help you keep your cash flow steady and your projects moving forward.