In theory—and often in practice—when you buy an item on credit, you will not actually have to pay for the item until after you have sold it (depending on how quickly you can sell the item).

If this happens, you have essentially used a creditor’s money to buy a product and have used a customer’s money to pay for it. This practice helps create a healthy cash flow because it keeps money in the business for longer periods of time and ensures that the business has cash to pay for the product once the bill becomes due. This increase in cash flow can sometimes enable you to keep some extra cash on hand. And having extra cash can help you take advantage of special promotions or bulk purchase discounts.

Although you can buy on credit in a wide variety of ways, three methods are most common: (1) post-dated checks, (2) consignment plans, and (3) creative lender arrangements.

Post-dated Checks

The option of using post-dated checks is available only in some areas of the world where banks are plentiful and business owners have access to inexpensive or free checking. Using post-dated checks is an excellent way to buy merchandise on credit, but it takes some practice. The key is making sure that funds are in the bank before the check is presented at the bank.

Ursula, a pharmacy owner, is an excellent example of how a business owner can wisely use credit to her advantage. In the Philippines, business owners have a very hard time obtaining large lines of credit (e.g., credit cards, cash advances from banks, and so forth). But the practice of using post-dated checks is accepted in almost every industry. So Ursula does much of her purchasing with post-dated checks. The process is as follows. If Ursula were to go to the market and make a purchase on May 4, she would write a check for the full amount and date it June 4 or even August 4. (The acceptable length of post-dated checks is generally 30 to 90 days.) The vendor from which she purchased the goods would hold onto the check until the date for which it was written. On that date, the vendor would cash the check and receive the appropriate money from Ursula’s bank account.

This method of using credit would enable Ursula to have merchandise in her store for 30 to 90 days prior to the time when she actually has to pay for the products. If all goes well, Ursula could sell the merchandise before the check is presented at the bank, and she would have more than enough in the bank to cover the amount of the check.

Consignment Plans

A second method for using credit is called “selling on consignment.” Consignment selling is an excellent way to offer more merchandise without having to pay money to purchase it and without incurring the risk of being stuck with inventory that does not sell.

This arrangement is used when a supplier needs to sell merchandise but can’t find anyone who is willing to buy it. When this occurs, you can offer to display the supplier’s merchandise for sale in your retail store under the following conditions. If a consigned product is sold, you will pay the supplier the normal cost of the good and keep the profit. But if the product does not sell after a certain period of time, the supplier must agree to take back the merchandise you got on consignment.

By getting inventory on consignment, you are able to offer a wide selection for your customers and thereby increase the likelihood of having customers purchase goods from your store. Selling items on consignment also gives you the opportunity to earn income on the markup of a product that you don’t even own yet. In order to sell on consignment, you must keep detailed records so you don’t get a false sense of ownership over items that belong to someone else. You must also be sure to pay the supplier for each good shortly after you sell it.

Creative Lender Arrangements

Some microenterprise owners operate in areas of the world where checks are not regularly used and where consignment is not commonly practiced. But even these business operators can take advantage of the benefits of buying on credit.

A modified consignment method can be used with suppliers who are seeking to sell merchandise but are not willing to part with their goods without any money or assurance of payment. Let’s use Marilyn, a business owner, and Jose, a supplier, to illustrate this concept. Marilyn and Jose have done business with each other for a few months and have established a relationship of trust. Marilyn is looking for some additional merchandise to sell in her grocery store, but she has very little cash to use in purchasing items. So she asks Jose if he has any products that are not selling particularly well. Jose says that he has had a hard time selling his supply of canned carrots and is worried that they might go bad if they aren’t sold soon. His usual wholesale price is .25 pesos per can.

Thinking creatively about buying on credit, Marilyn could ask Jose if she can buy 100 cans on credit at .15 pesos per can and see if she can sell them. She could propose that if she can sell the cans, she will pay cash for the .15 pesos per can that she borrowed on credit; if she can’t sell the cans, Jose must take the cans back and excuse the credit. (If, prior to making the deal, Jose is hesitant to take any unsold goods back, Marilyn might promise to pay Jose an additional five pesos for each product she sells.)

One additional way to get inventory through credit is to obtain merchandise on loan from a fellow retailer. If you know a business owner who has slow-moving merchandise, you might ask the retailer to loan the product to you to see if you can help the original owner sell the product for a fee or a percentage of the sale. For example, let’s suppose that Rosalima paid 25 pesos for a flashlight and has tried unsuccessfully to sell it for 45 pesos. Samuel asks Rosalima to loan him the flashlight so that he can try to sell it for 45 pesos. Samuel asks, “If I can’t sell it for 45 pesos, will you accept half of anything that I can make over 25 pesos?” If Rosalima says yes, and if Samuel is successful in selling the flashlight, both benefit. Samuel makes a little extra money on merchandise that he never paid for, and Rosalima is able to recover her costs on the flashlight (and maybe even make a little bit of profit).