Trade Credit: Your alternative start up capital

Did you know that you can start off in business without using any money? It is called trade credit. Joel Ogwang explores how best to utilise trade credit.

When Yudah Mukisa, a graduate of development economics from Makerere University unsuccessfully combed the streets for two years searching for a job, he gave up. But, just as he shut the door on job-searching, another seemed to open.

“I had studied how capital can be raised for a business. I went back to my notes two years after graduation and sought out ways of generating capital using a loan or trade credit.”
 

While a loan would involve going to a loan shark, SACCO or commercial bank, Mukisa realised he could not apply for a loan because technically, he did not qualify.
 

“I had no collateral. I did not own any asset apart from my clothes so I gave up on loans,” he adds.
 

When he explored his immediate option — trade credit — he decided to try it out.
 

Mukisa consulted Louis Katandi, his neighbour in Nabutti village, Mukono, for capital. Katandi is a wholesale dealer in stationery.
 

Far from requesting for money, Mukisa opted for stock. “I requested him to supply me with stationery but he was not willing to do,” he recalls.
 

“He (Katandi) asked me for money, which I didn’t have.”
 

“This is business,” Katandi said. “How are you going to pay for the supply?”
 

After long drawn–out negotiations, Katandi agreed to supply Mukisa with 10 reams of paper, for which he could pay upon selling them off.
 

“There was an old computer at home. I picked it and requested a former classmate who sells second–hand clothes near Uganda Christian University to allow me work from his shop,” Mukisa explains.
 

Competition

Like any other business, starting a stationery shop was tough; Mukisa had to venture into an unfamiliar territory where established business ruled.

This, however, did not hold him back. “My friend allowed me to work in his shop without contributing towards electricity bills for the first two months,” Mukisa says.
 

“I fixed the computer and started typing students’ courseworks at sh500 per page and sh100 to print (a page).”
 

First day in business

The first day, Mukisa got no clients. However, by the close of the week, he had earned sh10,000. Within a month, he pocketed sh100,000.
 

“I started paying for the reams I had taken from Katandi; depositing sh15,000 daily,” Mukisa adds.
 

Today, Mukisa rents a shop that has a printer, two reconditioned computers and other items. He is now standing on his own, but when he is hard up, he seeks help from his friend.
 

What is trade credit?

According to Investopedia, an online business website, trade credit is an agreement where a customer can purchase goods and agree to pay the supplier at a later date.

A credit company gives to an individual or another company for the purchase of goods and services. When goods are delivered, a trade credit is given for a specific amount of days.
 

The number of days for which a credit is given is determined by the company/ supplier allowing the credit, and is agreed upon by both the company giving the credit and the company receiving it.
 

With the extension of the payment date, the company receiving the credit essentially could sell the goods and use the net proceeds to pay back the debt. This type of credit is sometimes given to encourage sales.

Extended terms of credit can often be obtained from existing trade creditors, especially if a business has a good track record with them.
 

At times, a supplier may give a discount, if the customer pays within a certain period of time. For example, a 2% discount if payment is received within 10 days of issuing a 30-day credit.
 

It may be possible to negotiate with suppliers for example a 90-days’ credit or even as long as six-months instead of the usual 30 days.
 

Gideon Badagawa, the Private Sector Foundation Uganda (PSFU) executive director, says in Uganda, up to 95% of Small and Medium Enterprises (SMEs) rely on trade credit for capital.
 

“That is why we (PSFU) are pushing for the Chattels Security Bill because SMEs are unable to mobilise sufficient capital needed yet they lack collateral,” he explains.
 

However, he notes, trade credit works on the principle of trustworthiness, which many Ugandan business people lack.
 

“Most Ugandans have poor work-ethic and repayment culture. When they secure loans, for example, repayment becomes a problem. Many SMEs’ investments have been sold to recover loan monies,” Badagawa explains
 

If handled properly however, trade credit, Badagawa reckons, can be a sure source of SME capital financing.
 

“We need to do a lot on the demand-side of capital to train people on how to handle trade credit in particular and credit in general,” he says.

Testimonies from prominent business people

John Sebalaamu, the proprietor of Freedom City shopping mall on Entebbe Road: He says he relied on the good faith of traders in Dubai in the 1990s to make it in the clothes business. Sebalaamu also owns a number of commercial buildings in the central business district of Kampala.
 

“At the time, there were hardly any people importing new clothes on wholesale,” he said in an earlier interview.
Sebalaamu says they would come and sell the clothes and return to Dubai and pay for them. “It was an arrangement based entirely on trust,” he says.

Apollo Muhumuza, popularly known as Balya is a successful hardware dealer and real estate owner. He is behind Balya Mall and Balya Plaza, some of Mbarara’s most prominent commercial structures.

He runs Balya Stint Hardware, a building materials store in western Uganda. He is also the chairperson Mbarara Investors Club. In a recent interview he revealed that trade credit plays a big role in his business.

“I have a great relationship with my suppliers (Tororo Cement, Uganda Baati, Steel and Tube, East Africa and Roofings Ltd).
 

That helps me get materials on credit. I ensure I always honour the payment so that they find me trustworthy to deal with again,” Balya said.

Lt. Col (Rtd) Robert and Margaret Sekidde, proprietors of Seroma Ltd. The couple relied on trade credit to expand their business in the 2000s. They relied on the trust they had cultivated with cement and steel manufacturers.

“Initially, they (manufacturers) would give us products after we had deposited part of the money. But, the trust grew to a level where we would get products fully on credit sell and pay back after selling,” Margaret Sekidde explains.