Vendor financing is a type of finance facility provided by a lender to eligible borrowers so that they can buy products or services of a specific vendor. It is also known as deferred loans or supplier finance or trade credit. Under this type of financing the loan is provided directly or indirectly by the vendor. These loans usually have a higher rate of interest and the borrower also has to provide collateral.
Additional Reading: Assessing Creditworthiness Of Vendors And Customers Why Is It Important For Your Business
Benefits of Vendor Financing
- Vendors have the ultimate call regarding the sanction of the loan. Hence, they can decide whether the loan is to be extended to the buyer based on various factors like the credit profile of the buyer, relationship with the buyer, collateral or interest rate for the loan, etc.
- It helps the vendors realise higher returns for their products or services in the form of repayment of loans including interest.
- It helps the borrower with an uninterrupted flow of inventory from vendors.
- Easy access to finance for small businesses or start-ups that have limited or no access to traditional financing sources.
Types of vendor finances
Vendor financing can be of any of the following types,
- Debt financing
In this type of financing, the borrower essentially gets the finance in the form of a regular loan where they will have to pay interest at an agreed rate. Debt financing has lower long-term implications on the business of the borrower as compared to equity financing.
- Equity financing
Under this type of financing, the vendor may seek a portion in the equity of the borrower in exchange for the loan extended. The vendor has all the rights that are extended to a shareholder like dividends. It is usually beneficial in the case of start-ups that have a limited credit history.
- Service swap
Under this option, the vendor and the borrower agree to the exchange of their goods or services at agreed prices. These are in the nature of informal agreements usually between sound businesses that have sound working relations and complement each other’s business.
Final Thoughts
Financing is the key to a healthy business model where organizations can get uninterrupted access to funds to manage their daily affairs as well as ensure growth. Vendor financing is one of the many financing options where the borrower can get flexible loans easily with limited or no credit history.