Click to Print

Paying Your Suppliers

What kind of payment methods will your suppliers prefer?
April 20, 2006
URL: http://www.entrepreneur.com/article/21864

While most service providers bill you automatically without requiring credit references, equipment and merchandise suppliers are more cautious. If you are just getting started in business, you will not be able to give them trade references, and your bank probably will not give you a credit rating if your account has just opened.

If your supplier is small, the manner in which you present yourself is important in establishing credit. You may find the going tougher when dealing with a large supplier. A personal visit will accelerate your acceptance.

Present your financial statements and a description of your prospects for success in your new business. Don't even think of inflating your financial statements to cover a lack of references. This is a felony and is easily detected by most credit managers.

Some suppliers will put you on a c.o.d. basis for a few months, knowing that if you are under-financed, you will soon have problems with this payment method. Once you pass that test, they will issue you a line of credit. This creates a valid credit reference you can present to new suppliers until credit agencies accumulate enough data on your business to approve you for suppliers.

Most suppliers operate on a trade credit basis when dealing with other businesses. This basically means that when you're billed for a product or service, you have a certain grace period before the payment is due (typically 30 days). During this time, the supplier will not charge interest. It's similar to buying a product with a credit card.

Carefully consider all costs, discounts and allowances before deciding whether to buy an item. Always take into account what the final shelf cost of any item will be. The most common discounts are given for prompt payment; many suppliers also give discounts for payment in cash. When you can, specify on all orders how the goods are to be shipped so they will be sent in the least expensive way.

Occasionally, suppliers grant customers discounts for buying in quantity, usually as a freight allowance for a specific amount of merchandise purchased. Some suppliers pay an increasing percentage of the freight bill as the retailer's purchase orders increases; others simply cover the entire freight cost for purchases over a minimum amount.

If you order merchandise from distant suppliers, freight charges can equal as much as 10 percent of your merchandise cost. Ask what a manufacturer's or supplier's freight policy is before ordering, and make sure the order is large enough to warrant the delivery charges. If the manufacturer does not pay freight on back orders, you might consider canceling a back order and adding it to the next regular shipment.

Become familiar with each of your suppliers' order-filling priorities. Some suppliers fill orders on a first-in, first-out basis; others give priority to the larger orders while customers with smaller orders wait. Consequently, most retailers specify a cancellation date on their orders. In other words, any goods shipped after that date will be returned to the suppliers. By specifying a cutoff date, you increase the chances that your orders will be shipped promptly and arrive in time.

Give careful attention to shipments when they arrive. Check to make sure you've received the correct amount and type of merchandise, and make sure the quality matches the samples you were shown.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press