Putting people first - Vendor Finance
Vendor financing is a lending of money by a vendor to a customer who uses that capital to purchase that specific vendor's product or service offerings. It is also called "trade credit.
Vendor financing usually takes the form of deferred loans from the vendor. It may also include a transfer of stock shares from the borrowing company to the vendor. Such loans typically carry higher interest rates than those associated with traditional bank loans.
Key Features - Vendor Finance
- Vendor financing is the lending of money by a vendor to a business owner, who, in turn, employs that capital to buy that same vendor's products or services.
- Vendor financing deals often carry higher interest rates
- Vendor financing helps in building strong relationships between vendors and business owners.
- Vendor financing helps business owners to purchase goods or services without availing of traditional bank loans or pledging their personal assets as collateral.
Types of Vendor Financing - A different approach financing
Vendor financing can be structured with either debt or equity instruments. In debt vendor financing, the borrower agrees to pay a particular price for inventory with an agreed-upon interest charge. The sum is either repaid over time or written off as a bad debt.
With equity vendor financing, the vendor can provide goods in exchange for an agreed-upon amount of company stock. Equity vendor financing is more common with startup businesses, which often use a form of vendor-supplied financing known as "inventory financing," which essentially uses inventory as collateral to back lines of credit or short-term loans.
Advantages - Vendor Financing
- The vendor increases their sales by this financing option.
- The vendor earns interest on the loan which is usually higher than that available from other financial institutes.
- The vendor has a firm business relationship with the borrowing company.
- Sometimes the purchasing company also provides shares in their company as security, thus the vendor gains a hold of the purchasing company.
- Price sensitivity is reduced so the purchase becomes more attractive.
- The purchaser is able to buy goods that they would otherwise be unlikely to be able to afford.
- The procurement process is streamlined as the purchaser does not need to search for financing.
- The purchaser's cash flow is eased as they have a fixed payment to make over the next three to five years.
- During the underwriting and funding process the lending company receives an approximation of the credit worthiness of the borrowing company.
Key terms - Vendor Finance
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