What is a Vendor Finance Program, and How Does it Work | CredAvenue

What is a Vendor Finance Program?

Vendor financing is also sometimes referred to as “trade credit”. It is a financial arrangement like deferred loans from the vendor and may include a transfer of shares from the customer/borrowing company to the vendor.

 

Vendor Finance Program – The Concept Explained

Vendor finance arrangement or program helps improve the relationship between vendor and customer, resulting in mutual benefits. A vendor finance program is typically used when traditional financial institutions are not interested in lending substantial money to a business/customer. The company’s vendor can bridge the gap and create a business relationship with the customer in such a situation. In vendor financing, a vendor notices a higher value in a customer’s business which a traditional lending institution often overlooks.

Although from the vendor’s viewpoint, it’s certainly not ideal for providing products or services without immediately receiving payment, making a sale with delayed payment is, however, far better than no sale at all. Further, the vendor collects interest on the deferred payments. Often, these loans are available at a higher interest rate than that offered by banks, compensating vendors for the higher risk of default. Furthermore, a vendor can win a competitive advantage over rival firm/s by offering vendor financing programs. Consequently, a healthy, trustful association develops between the borrower and the vendor.

Also, borrowers/customers often prefer vendor financing when purchasing essential goods at the vendor’s warehouse. It allows them to obtain trade credit without borrowing from the bank or using their retained earnings. Further, by borrowing from sources other than a bank, the borrower keeps bank financing to be used later for capital-intensive activity or revenue-boosting capital improvements.

Types of Vendor Financing

Vendor financing is of two types – Debt financing and Equity financing.

  1. Debt financing: The borrower agrees to pay a particular price for inventory with an agreed-upon interest charge. The interest charge accrues as time advances, and the borrower either repays the loan, or the debt is considered a bad debt. When bad debt occurs, the borrower will be unable to enter into another debt vendor financing arrangement with the vendor in future.
  2. Equity financing: The vendor provides goods in exchange for an agreed-upon amount of borrower’s stocks/share with the equity vendor financing. Equity vendor financing is more familiar with startup businesses, which often use a form of vendor financing which uses inventory as collateral to back lines of credit or short-term loans. The borrower here does not make cash repayments since the vendor is paid in shares. Here the vendor becomes an equity shareholder and participates in dividends and decision making of the borrower’s company. Equity vendor financing is quite familiar with startups that are yet to build a credit history with traditional lenders.

How Does the Vendor Finance Program Work?

  • First, a vendor and a customer enter into a vendor financing arrangement.
  • Upon entering into this arrangement, the borrower must first make an initial deposit.
  • The balance amount of the loan and any accrued interest is later paid over an agreed period regularly.
  • The interest rates may vary, depending on the agreement between both parties.
  • A borrower might opt to obtain trade credit from a vendor rather than borrow from a financial institution under several circumstances. One such situation is when a borrower does not meet the lending requirements of banks.
  • Though vendors do not provide credit, they often do so to facilitate sales, thus providing sellers of high-ticket items an edge over their rivals.

Benefits of Vendor Financing

How the Vendor benefits:

  • Vendors enjoy the ability to receive an annuity stream even after ceasing to control the business. The vendor further reserves the right to repossess the business/sell assets of the company to regain the unpaid amount if a borrower defaults on the loan repayment.
  • Since the buyer cannot access loans from financial institutions, they depend on the vendor’s goodwill to finance the transaction. The high level of control enables the vendor to obtain a higher sales price.

 

How the Borrower/Company benefits:

  • A borrower obtaining vendor financing is not required to make all the payments at a time. Instead, he can use the profits earned by the business to make regular payments to service the loan. It can thus prove to be beneficial for the buyer.
  • The borrower does not have to use personal funds to finance the asset or business purchase.

 

Why a Vendor Financing Platform is Right for You?

Vendor financing can prove to be an incredibly excellent tool for business. Vendor financing in India can benefit both companies and vendors, if done the right way.

YubiFlow by Yubi is an end-to-end Trade and Supply Chain platform. It is the most advanced and innovative platform having Vendor Finance Solutions including Purchase order finance, Sales Invoice discounting and Sales billing discounting.

 

FAQs-

Q: Why do startup businesses prefer equity vendor financing?
A: Equity vendor financing is more common in startup businesses as banks often refuse to lend to a relatively new business who don’t have substantial established credit. This is where startups prefer vendor financing, which often uses vendor inventory as collateral to back lines of credit or short-term loans.

Q: How does vendor financing benefit the vendor?
A: Although it’s not ideal for a vendor to provide products or services without immediately receiving payment, making a sale with delayed payment is far better than no sale at all. Further, the vendor collects interest on the deferred payments. These loans are available at a higher interest rate than banks offer, compensating vendors for the higher risk of default. Also, a vendor can win a competitive advantage over rival firms by providing a vendor finance program.

Q: How does vendor financing benefit the borrower?
A: Companies/customers often prefer vendor financing when purchasing essential goods available at the vendor’s warehouse. It allows them to obtain trade credit without borrowing from the bank or using their retained earnings. Further, by borrowing from sources other than a bank, the borrower preserves bank financing to be used later for capital-intensive activity or revenue-boosting capital improvements.

Q: What is the interest rate offered by the vendor to the borrower or buyer?
A: The interest rate offered under Vendor Finance depends on the business requirements and varies from bank to bank.

Q: What is the repayment period of Vendor Finance?
A: The repayment period of Vendor Finance ranges from 30 days to 24 months.

Q: If I possess a bad credit score, am I eligible to get Vendor Finance?
A: Yes, you are still able to get vendor finance but the interest rate offered by the lender shall be on a higher side as compared to other business loans.

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