No matter the industry, running a business is always an expensive, investment-heavy venture.
This is especially true for smaller companies that are either just getting off the ground or have their sights set on growing larger in the near future. In either of these cases, the costs associated with these processes can cause small business owners to deplete their reserve funds—leaving them with barely enough capital to continue operating at any capacity at all.
This is why many B2B vendors offer to create a business tradeline with their purchasing companies.
What Is a Business Tradeline?
A business tradeline is formed when a B2B buyer creates an account with a vendor in which they agree to repay the vendor over time for products and services provided at the present moment. Think of it like using a business credit card to purchase goods, but instead of using a financial institution you get a line of credit straight from the source.
So, for example, a small business might register an account with an office supply wholesaler, who would then deliver an order in full to the buyer with the understanding that the buyer will pay the vendor back in installments throughout the months to follow.
Small Business Tip: Typically, terms are set at “net 30,” “net 60” or “net 90,” meaning the buyer agrees to pay the vendor back over the next 30, 60 or 90 days.
Now, it’s important to point out that the terms “business tradeline” and “business account” aren’t synonymous. Technically, a tradeline is the record of transactions made between the vendor and the purchasing company (who has created an account with the vendor).
The reason we point out this nuanced difference is that the function of a business tradeline is to act as evidence of a purchasing company’s financing and repayment history. Essentially, a purchasing company’s tradelines (with multiple vendors) lets other lending or crediting vendors know whether or not they should allow the buying company to open an account with them.
Let’s dig a bit more into this, shall we?
Business Tradelines and Your Credit Score
Needless to say, if your history shows periods of delinquency, vendors will likely shy away from entering into crediting agreements with you. On the other hand, if you’ve proven to be a reliable borrower, you should have little issue having future lines of credit or other business funding options extended to it.
Small Business Tip: If your company has no business tradeline history, vendors may look at your personal credit score to gauge creditworthiness. Make sure to stay on top of both, because your personal finances could be the deciding factor in getting the business funding you need.
Like personal credit scores, business credit scores are determined using a variety of data regarding a company’s financial and credit histories and are a reflection of a company’s creditworthiness. Your tradeline history can have a large effect on your overall score.
Now, the reason we said that your tradeline history can factor into your overall business credit score is because not all vendors report to the financial institutions that calculate them ( Equifax, Experian, Dun & Bradstreet and FICO).
In some cases, it’s simply company policy to keep account information confidential. In others, the vendor’s policy may be a bit more nuanced. For example, a vendor may only report tradeline history of buyers that open large accounts, or those that they’ve worked with for longer periods of time. Similarly, some vendors or lenders may only report certain transactions they conduct with purchasing companies based on their nature.
The problem with borrowing from non-reporting companies is that your positive standing with them won’t have an impact on your credit score at all. While you’ll likely be working on building your business credit score up in other ways (such as opening and diligently paying off business credit card accounts), you’ll want to take advantage of every opportunity you possibly can to help it grow.
This can’t happen if you’re working with non-reporting vendors.
While a quick Google search shows you many resources available that help you find vendors that do report tradeline histories to credit bureaus, your best bet is to simply ask your potential vendor what their policy is. Given two companies who are otherwise equal in every way, you definitely want to work with the one who will also help you work toward improving your business credit score.
How Do Closed Business Tradelines Affect Business Credit Scores?
For a variety of reasons, vendors and buyers (or even just one of the two parties) may decide to close the tradeline between them—essentially meaning a parting of ways for both.
For purchasing companies, closed business tradelines can have a huge impact on their credit scores.
This impact can be felt in two different ways. When a tradeline is closed out, it will remain on the company’s credit report. Accounts in good standing typically stay on a report for ten years, while negative accounts drop off after about seven.
In other words, if you leave a tradeline in good standing, your business will be rewarded for your diligence throughout the next decade. However, if it was terminated in poor standing, you’ll have no way of removing the blemish on your credit report for quite some time.
Another consequence of having the account closed is the negative effect it can have on your credit utilization ratio. Let’s say you currently have three active accounts open, each with a $50k limit. Account A is completely paid off; Account B carries a $15k balance; Account C carries a balance of $25k.
As things currently stand, your total credit usage is $40,000 out of a maximum $150,000, or a little over 26 percent. But, if you were to close Account A, your total credit usage would be $40,000 out of only $100,000, or 40%.
This, unfortunately, could wreak havoc on your business credit score.
While you’ll certainly open and close a number of tradelines over the course of your business’s lifespan, you’ll always want to consider how these changes will affect your credit score both immediately and in the future.
Seasoned Business Tradelines and “Piggybacking”
So far, we’ve been working under the assumption that your business (and/or personal) credit histories are in good enough standing to secure accounts and create business tradelines with vendors and suppliers as needed.
For those who may not have the best credit history (or those who have no credit history and are not having luck securing lines of credit), you’re not completely out of options just yet.
This is where seasoned tradelines and “piggybacking” come into play.
A seasoned tradeline, in the simplest of terms, is a tradeline that shows a purchasing company’s good standing with a vendor over an exceptional amount of time. Typically, seasoned tradelines show a record of payments made in full with no delinquencies over at least a two-year period.
What does this have to do with your company that has little or no credit history?
Well, many companies that have seasoned tradelines open with their vendors will offer to let smaller businesses “piggyback” on their excellent credit histories.
How Piggybacking Seasoned Tradelines Works
- Buyer A has seasoned tradelines opened with a number of different vendors.
- Buyer B needs to improve their business credit score before any suppliers will consider opening an account with them.
- For a fee, Buyer A will “sell” their tradelines to Buyer B, who then inherit the excellent credit history Buyer A has built up. How is this achieved? Buyer A adds Buyer B as an “authorized user” of his or her accounts. However, Buyer A does not disclose any pertinent account information that would allow Buyer B to make charges against this account.
- Now, Buyer B can show potential vendors “their” excellent credit history, making the vendor more likely to want to do business with them.
Negatives of Piggybacking
If that all sounds a bit murky in terms of ethics and legality: Good.
While piggybacking may sound like a decent shortcut to securing lines of credit, there are a number of reasons you don’t want to go down this road.
First of all, while piggybacking isn’t technically illegal, the institutions that calculate your business credit score definitely don’t take too kindly to companies that use the practice. If any red flags pop up and it’s found that you’ve tried to beat the system, your new score is likely going to reflect as much.
Secondly, companies that offer piggybacking services typically do so for a very pretty penny. When looking for a company to piggyback off of, you should anticipate investing at least a few thousand dollars into the initiative—and potentially much more. If your company is already strapped for cash as it is, going this route is merely going to dig you further into the hole.
Going along with that, the simple fact is that piggybacking merely changes what your company’s financial situation looks like on paper. Sure, you were able to secure a line of credit with a new vendor—but that’s only because they thought you had the capacity to pay it back. If, in reality, you aren’t able to do so, you’ll end up doing even more harm to your ability to secure business credit in the future.
Long story short:
While piggybacking on seasoned tradelines can work as a last-ditch effort to grow your business’s credit score, your best bet is to simply keep searching for vendors willing to let you prove your trustworthiness the honest way.
How to Get Business Tradelines
Now that you’re an expert, you may want to open a few tradelines with vendors to get the goods you need while building your business credit score. It could be as simple as searching online for vendors that report to credit bureaus. Use any connections you’ve made that could help you find reliable, trustworthy partners.
It’s important to have as many positive people behind you as you can on your journey as a small business owner. Opening tradelines with the right vendors is a great step in getting to where you want to go.