Commentary: Borrowing on ‘trade credit’

The focus of 2011 was largely on the economy and the increased disparity it created between the wealthy and middle class. But in 2012, the discussion in Washington and in many other parts of the country is likely to center on the disparity between large corporations and small businesses.

While corporations are hoarding a record amount of cash in reserves, research conducted by my firm and Pepperdine University has demonstrated that small businesses are hungry for expansion capital but are unable to access it. Since small businesses are the traditional engines of job creation, the inability of small businesses to borrow is quite literally choking off the ability of our economy to create jobs.

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With bank lending at record lows and the government in gridlock, small businesses are now left with little choice other than to take matters into their own hands.

One of the most entrepreneurial methods seen today for seeking capital is for businesses to borrow from each other. Data from our firm has demonstrated that this technique, known as “trade credit,” is on the rise and will likely accelerate in 2012. This type of capital typically comes by way of short-term inventory loans or trade terms. Businesses allow other businesses to borrow products or pay for items after they have been sold in the store. This in effect acts as a loan and is a powerful source of growth capital.

Trade credit is actually a very old form of financing with roots in ancient societies. In the realm of economics and trade, some principles never go obsolete. Dating back to Babylonian times, merchants increased their available capital by simply having the time to pay for inventory from their suppliers extended. Then and now, the extra time allows merchants to sell their services before paying, increase inventory and jobs and expand their overall business.

Most business owners know that if they want bank loans, they should go to a bank. Fewer business owners know how to acquire trade credit, which can be an equally valuable tool. Here are some steps to take when asking your suppliers for trade credit:

●Do an inventory of your major recurring supplier bills. Some are likely large, some are small. Focus on the big ones first.

Determine if you have any contracts in place with these suppliers and whether you intend to renew at the end of the existing contract term. A renewal commitment is a useful carrot to offer in your negotiations when requesting longer payment terms.

Many suppliers will want to pull your business’s credit file in order to get a more complete picture of your financials prior to extending your payment terms. For this reason, it is useful for you to view your business’s credit file before your suppliers do. You’ll want to identify any mistakes and make sure your profile accurately reflects your business. If your file is largely empty, as many are, then simply adding in examples of good payment history can boost your scores.

Small businesses are clearly having difficulty accessing the capital they need to grow and hire. This new year will be the time for small businesses to take control and proactively take steps to build their businesses and ultimately turn around the economy.

Jeffrey M. Stibel is chairman and chief executive of Dun & Bradstreet Credibility Corp.