What Do Business Tradelines Mean?

What Do Business Tradelines Mean?

Business tradelines are lines of credit extended to businesses by their vendors, by which the business receives goods or services for which it agrees to pay at a later date. Businesses may have tradelines with many different vendors, and they generally agree to pay 30, 60 or 90 days after receipt of the goods and services.

How Tradelines Are Established

Tradelines are often established between a business and a vendor, as opposed to a line of credit offered by a bank. A building supplies store, for example, might order several pallets of pine lumber and agree to pay the lumber mill 30 days after receipt. This enables the business owner to sell the lumber and pay the costs of its stock out of sales revenue. A vendor may pull the company's credit report to decide if it is creditworthy before extending a tradeline, and in some cases may review a small business owner's personal credit report, especially if business credit has not been established.

Who Uses Tradelines?

Not all small businesses use credit. But three-fifths of small businesses that do use credit use trade credit lines, according to the U.S. Small Business Administration. Businesses that use trade credit tend to have lots of assets and liquidity, or access to cash, but many also have more debt than companies that don't use credit. Construction and manufacturing are two industries that tend to use credit.

Impact On Credit Score

Using tradelines can help businesses build credit since the loans are frequent and the turnaround quick. They can also help rapidly build positive credit experiences. However, because vendors are not required to report credit experiences with a business to any reporting agency, a business could spend years creating a positive credit record that never shows up on a credit report. If possible, establish trade lines with companies that report regularly. Unlike individual credit scores, business credit scores range from 1 to 100; 75 is considered a very good score.

Seasoned Lines of Credit

There are many companies online promising to sell trade lines. Many of these are selling "seasoned" trade lines. If your company has poor or little credit, you can, for several hundred or several thousand dollars, have your business piggybacked onto the account of someone who has established excellent credit. This enables new business owners to appear to have more creditworthiness than they have established for themselves. While seasoned credit is legal, it can wind up costing business owners more than obtaining their own credit at higher interest rates, according to the credit reporting agency Experian. It is also an easy way for someone who isn't experienced at managing credit to get into financial trouble.

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