Your business needs cash to help it grow. In an ideal world you’d always have plenty of it available. But every business experiences late payments, unplanned expenses and other events where cash flow is uncertain.
Accessing the money from completed work now - instead of 30, 60 or 90+ days - can mean the difference between a healthy growing business or a bankrupt one.
There are many finance options available to SMEs. But not many options for getting your money faster. You can get invoice financing, where you’re borrowing money against your invoice. But that’s often expensive and slow. You can sell the invoice to a factoring company, but the same problems apply.
Now there’s another option. We call it a credit stretch. A credit stretch gives 60 days of interest free credit to approved buyers, so sellers can get paid immediately.Read on to learn more about this type of financing, examples of why your business could use a credit stretch, and how to apply.
What is a credit stretch?
Sellers often give their customers 30, 60 and sometimes more than 90 days to pay for goods and services as a competitive advantage. A competitive advantage that is, unfortunately, costing them Trillions of dollars in late payments.
A credit stretch is a financing option that gives SMEs immediate access to the money they’re owed right after they complete the work. The credit stretch also gives the buyer 60 days of interest free credit so they can use the money to continue growing their own business.
It’s a financing option that improves relationships between buyers and sellers. With a credit stretch, everybody wins.
Who uses a credit stretch and why?
SMEs in particular benefit from credit stretching because financing from major banks can be difficult.
Many banks take the personal credit rating of the business owner into account, making the smaller businesses unapproved for financing. This means many healthy, growing businesses miss out on the cash they need to grow. And the global stock market crash of 2008 only worsened the outlook for small business owners.
A credit stretch doesn’t take your personal credit rating into account. The credit rating of the buyer is all that matters. If they’re creditworthy, you’ll get finance.
So, any SME that sells goods/services to a creditworthy customer can access immediate finance.
Industries with long production cycles, construction, manufacturing, retail, find that credit stretching gives them the ability to grow much faster than other finance options. Especially when offering longer payment terms is seen as a competitive advantage.
What are payment terms?
When you finish lunch at a café, the bill comes. You pay it before you leave. You can either pay with cash, or you can do what almost everyone does, and use a credit card.
When you use a credit card you're deferring the payment for 30 days while the café gets the money immediately. If you pay before 30 days, you suffer no charge. Wait longer and you pay a small fee.
B2B transactions are similar. But unlike using a credit card to pay for lunch, most SMEs are getting hurt by this payment culture. In fact, over $1T of late and unpaid payments are floating around the financial ecosystem at any one time.
This culture is leading to mass uncertainty. SME owners that don’t know when they’re getting paid or lack the money to make purchases will lose time, important growth opportunities and risk bankruptcy.
In order for B2B commerce to meet the needs of a 21st century economy, transactions must happen in real-time.
Sellers that offer longer payment terms provide the product or service right away but don’t expect buyers to pay until the agreed-upon time.
That means millions of SMEs are acting like a credit card company. But without the financial foundations to keep them from collapsing into oblivion.
The most common net terms are as follows:
30 days. Payment is due in full within 30 days.
60 days. Payment is due in full within 60 days.
90 days. Payment is due in full within 90 days.
Some industries will, however, offer as few as seven days to settle your account. Others might give you as many as 180 days. Do your due diligence to make sure you don’t get involved in a situation you didn’t anticipate.
What industries use credit stretching?
Any business involved in the manufacturing, distribution and buying of products/services can use a credit stretch to accelerate their cash flow, remove the risk from doing business with suppliers and improve relationships with the companies they do business with.
Here are some examples of the more common businesses and situations that can use credit stretching:
Cleaning services. A cleaning services company might use a credit stretch to get the supplies and tools they need.
Creative agencies. A creative agency might offer credit stretching to its customers, as a competitive advantage in an otherwise oversaturated market.
Accountants and bookkeepers. Small accounting firms that work with a number of businesses may decide to do the same thing, invoicing clients each month and giving them the option to credit stretch.
Landscaping companies. A commercial landscaping business might use a credit stretch to procure fertilizers and other lawn care chemicals and supplies. The company may also offer its corporate clients 60 days of interest free credit on their invoices.
Clothing companies. An apparel company might buy several pallets of plain white T-shirts with a credit stretch and put their own designs on them before selling them and repaying their supplier.
Restaurants. A restaurant might get an order of ingredients from a food supplier with a credit stretch repaying the CreditStretcher after they’ve sold it all in meals.
Beverage manufacturers. A brewery might procure hops, barley, grains, and other ingredients with a credit stretch. Their suppliers get paid right away while the brewery gets 60 or, even, 90 days to pay.
Construction companies. Construction businesses may use a credit stretch to purchase wood, nails, roofing supplies and more to help finance projects. Their supplier gets their money right away - this never normally happens in the construction business.
Manufacturers. Manufacturing companies may rely on a credit stretch to finance the production of a line of goods.
Wholesalers. Wholesale companies may procure items with a credit stretch.
Retailers. Like wholesalers, retailers may get products with a credit stretch. That way, the suppliers get their money immediately, and the retailer gets 60 days interest free credit.
Why do businesses use a credit stretch?
Why do SMEs offer a credit stretch in the first place?
There are several reasons:
SMEs struggle to get other types of financing.
SMEs don’t have many financing options these days. Some studies show that almost 30% of SMEs are unable to find funding at all. Most companies in the B2B supply chain have razor thin margins, so getting money faster matters. A credit stretch gives SMEs access to the supplies they need to continue growing profitably.
It’s a competitive advantage.
Sellers that can offer long payment terms have a competitive advantage over other companies who want the money now. More and bigger deals equals a faster growing business.
It will grow your business.
Companies that get paid faster, can grow faster. Companies that hold onto their money for longer, can grow faster. A credit stretch will give companies that buy and sell both options.
It builds relationships.
As all SME owners know, it’s not always easy to access cash. If you are a supplier or vendor working with other small businesses and you’re willing to extend credit, small business buyers are most certainly appreciative and more likely to do business with you.
What’s the best way to use a credit stretch?
Credit stretching gives SMEs back the control they lost when payment terms of 30 days or longer became normal.
If your business wants the money from an invoice payment today, a credit stretch will give that to you. If you’re buying goods and you want 60 days to pay, without paying any interest, a credit stretch can give that to you, too.
Many companies who use a credit stretch improve relationships with their customers. If you’re a small SME and you’re selling to a larger company.
When you offer the large company 60 days of interest free credit on the purchases, you’re putting yourself ahead of the competition and offering your buyer something extra. Something that stops you from asking them to pay their invoice on time.
How does a credit stretch help SMEs?
When you’re low on cash, you can’t afford to procure the goods you need to grow your business.
Unless, of course, you find a supplier that offers flexible terms and is willing to extend credit to businesses like yours.
A credit stretch enables cash-strapped small businesses to get the goods they need without having to fork over money they don’t have.
Compare that to banks, which require a seemingly endless amount of paperwork and documents and can take months to decide whether it makes sense to lend money to your company.
How do I apply for a credit stretch?
If you’re selling, and assuming that your customer is creditworthy, which you can check quickly through the CreditStretcher app, you will get finance.
If you’re buying, you’re creditworthy and your supplier agrees to pay 3.75% to get paid immediately, you will get 60 days of interest free credit.
Here’s the process of applying for a credit stretch:
1- On the creditstretcher.com homepage decide if you’re buying or selling. Then click the buying or selling.
2- Create an account and enter your details.
3- Take a photograph of the invoice you’d like to credit stretch.
4- Inform your client that you’d like to credit stretch.
5- If they’re creditworthy and agree to the terms & conditions, you’ll receive the money immediately after you both sign the digital signature.
What are the pros and cons of using a credit stretch to get paid faster?
Pros of a credit stretch for buyers:
- No lengthy application process
- Ease your cash flow worries
- Completely free credit up to 60 days.
- Just 1% for 90 days of credit.
- Access to the supplies and materials you need.
- Stay current with industry news and developments
- Keep your customers happy
Summary: Cons of a credit stretch for buyers:
- If you’re not creditworthy, you won’t get a credit stretch
- If you don’t pay on time you can end up owing late fees
What are the pros and cons of using a credit stretch to extend your credit?
Pros of a credit stretch for sellers:
- Increase sales from cash-strapped customers
- Gain an edge on competitors that don’t offer a credit stretch
- Helps establish trust and build customer loyalty
- May gain additional customers via word-of-mouth recommendations
Cons of a credit stretch for sellers:
-You may have to convince your buyers to agree to sign the agreement. But we can help you with that.