A vendor credit line is a type of business credit extended by suppliers to buyers to allow them to accept shipments of goods and pay for them later. This practice is especially common in retail but can be seen in other forms of business as well. Typically a vendor credit line starts small, with limited terms, and as customers establish a good credit history, they can get a more favorable arrangement. This is often a private form of credit, and many vendors do not submit reports on their customers to credit bureaus.
In a classic example of a vendor credit line, a retailer can order a shipment of widgets from Company A, which will ship them on net 10 or 15 terms. This means that the buyer has 10 to 15 days to submit a payment for the shipment. The idea is that customers don't have money until they sell products, so the vendor agrees to wait on payment to give the customer a chance to move the products and collect enough money to pay the bill.
If the customer pays on time for several shipments, the vendor may start taking larger orders, allowing the customer to float more debt. It can also extend the terms to 30, 60, or even 90 days. The vendor credit line will become more favorable over time as a reward for good performance and an incentive to keep doing business with that vendor. If the creditor does not submit payments on time, the vendor may change the terms back, shifting from net 60 to net 30, for example, or limiting the total amount of credit available.
Usually a vendor credit line will be unsecured, although some vendors may require a deposit. In the event of bankruptcy, the vendor must wait in line behind creditors with secured loans to see if anything is left of the customer's assets. This can be risky, and vendors are consequently very careful about extending offers of credit. They may require references and will provide warnings about what may happen if customers fail to pay their bills on time.
Businesses can take advantage of a vendor credit line to get products into stores before having to pay for them, freeing up cash for activities like covering payroll, overhead expenses, and other costs. In the case of a vendor who does submit credit reports, the vendor credit line can also be useful for establishing a strong credit history, making it possible to apply for other types of credit like small business loans, real estate loans, and so forth.
