What is Vendor Finance?
Vendor finance is a short-term funding contract in which a vendor assists his customer with financing, either directly or through a third-party vendor financing company. Following the issuance of the financing from the vendor, the customer will purchase the goods or services provided by the vendor.
Vendor Finance, also known as Supplier Finance or Trade Credit, can also take the form of a revolving credit arrangement that allows the borrower to borrow money from his vendor regularly after every payment. It is typically a secured financing method in which the borrower must pledge his assets or invoices as collateral.
Vendor financing can also be used as a form of deferred credit payment. The borrower will not be required to pay for their purchases in full at the time of purchase under the deferred credit arrangement. They can, alternatively, wait until they sell the finished goods before making the payment.
Our SCF Platform Helps You Meet with Your Vendor Financing Needs!
The biggest benefit of vendor financing is also the reason why it’s so important in businesses.
Vendor financing allows customers to purchase supplies without the need to take our any loan from any financing institution. This helps them save a lot of money on interest and does not overburden them with additional debts. Vendor financing strengthens the relationship between the vendor and the buyer & keeps third-party financial institutions out of the picture.
Types of Vendor Finance
- Debt Vendor Financing: In debt vendor financing, the borrower will receive the goods or services at a selling price, but the borrower will have to pay interest to the vendor at an agreed rate. If the borrower can’t repay the loan, the borrower will be designated as a defaulter, and the loan amount will be written off as bad debt. Upon being declared a defaulter, the borrower will be barred from entering another debt vendor financing agreement.
- Equity Vendor Financing: During an equity vendor financing transaction, the vendor will sell his goods or services in exchange for a predetermined amount of the borrower’s stock. Because the vendor is compensated in shares, the borrower will not be required to make a cash payment to the vendor. The vendor will be treated as a shareholder in the company and will receive dividends in proportion to the number of shares held. Additionally, the vendor will become a part of the borrower’s management. Generally speaking, the greater the number of shares owned, the greater the influence on business management.
Example of Vendor Financing
Consider a company XYZ which acquires supplies on a biyearly basis from ABC, a vendor. Now, say XYZ, the buyer, is growing through a liquidity or working capital crunch and is unable to afford the same quantity of supplies as before. Vendor ABC lends a helping hand through vendor financing.
So, if XYZ(buyer) has Rs. 3 crore to pay but needs Rs. 5 crore worth of supplies, then it pays Rs. 3 crore to ABC (vendor), who delivers the entire Rs. 5 crore worth of supplies. ABC finances the additional Rs. 2 crore at a nominal interest rate, which XYZ repays in month instalments.
Yubi helps vendors connect with more than 750+ lenders and banking institutions & avail of different kinds of vendor financing options such as invoice discounting, working capital loans, etc. in tandem with their customers, all on one single platform.
Benefits of Vendor Financing with Yubi
✓ If the borrower has a satisfactory business relationship with the vendor, the vendor might lend the funds without charging any interest.
✓ Vendor finance helps the borrower keep the production or operations of their business uninterrupted.
✓ The borrower can pay off the loan with the profits they make from the sale of goods or services.
✓ It helps the borrower with good cash flow to run their business smoothly.
✓Compared to bank loans, vendor finance is typically less complicated to obtain and requires significantly less documentation, which makes the transaction 5x quicker.
✓Borrowers who are ineligible for bank loans can take advantage of vendor financing.
✓ When the borrowing company purchases more, it can sell more, resulting in a win-win situation for both vendors and borrowers alike.
Benefits of Vendor Financing to Vendors:
✓ Vendors can earn interest on the loan amount borrowed.
✓ Increased customer retention and consistent sales are possible for the vendor.
Features of Vendor Finance
- Vendor financing is probably one of the easiest way to get quick working capital finance.
- Loan amounts depend on the requirements of the business
- Convenient repayment options as deals occur between supplier and their buyers
- Fast sanctioning and turnaround
- Hassle-free process with minimal documentation
- Vendors can avail financing in the form of bill or invoice discounting, working capital loans, and other kinds of structured business loans against confirmed buyer orders.
- Depends closely on the relationship between vendor and buyer
- Interest rates on the higher side
- Credit line offered as per the vendor’s financial health and credit score
How does Vendor Financing Work?
Let’s understand how Vendor Financing works with the help of an example:
Mr. Suresh, a milk distributor with a small store located in a petrol pump, isn’t getting a lot of customers. So he decides to sell milk to his existing customers via home delivery and agrees to be paid monthly.
He finishes all of his orders in the first month, proving that his new concept is a success. His home delivery business grows in the second month, but he can’t keep up with the demand for deliveries and the high fuel price.
He applies for a loan at a bank, but his application is turned down. To slow down the supply of his product, he contacts his vendor and describes the situation.
The vendor recognises the problem and decides to sell the milk without receiving payment upfront from Suresh, instead of agreeing to receive payment after Suresh’s customers pay him but with an additional 10% interest.
Here’s the step by step process of how vendor finance works:
✓ The vendor evaluates the borrower’s business and draughts the terms and conditions of the financing.
✓ The borrower will agree to the terms of the vendor and will make a down payment on the purchase.
✓ The vendor will begin selling the goods or services by charging interest on the amount paid for the goods or services.
✓ The borrower will sell the goods or services to their customers and then repay the vendor the money loaned to them.
Why is Vendor Financing for You?
With Yubi’s Yubi Flow platform, you can enjoy the below features:
✓ Minimal and easy documentation
✓ Intermittent negation of interest by the vendor
✓ Quick loan approvals
✓ Short term capital loan
✓ The vendor might provide you with a loan without collateral
✓ Get a loan proportional to the business requirement only
✓ Various repayment options are available
✓ Improved relationship with the vendor
✓ Pay off the loan with profits
✓ Continuous cash flow for smooth functioning of the business
- All necessary KYC documents
- Application Form Duly Filled
- Balance Sheet for the last two years
- The purchase invoice, copy of agreement, or contract order between the business and the vendor
- Business registration and establishment details
- Last twelve month’s bank statement
- Last year’s profit and loss statements
- Audited financials of the vendor
- Income proof of the applicant
Popular banks and NBFCs offering Vendor Finance in India
Some major banking and non-banking financial institutions offering vendor financing in India are:
- South Indian Bank
- Bajaj Finserv
- State Bank of India
- HDFC Bank
- Axis Bank
- ICICI Bank
- IDBI Bank
- IDFC First Bank
- Indus Ind bank
- Standard Chartered Bank
It is a financing arrangement where a third-party vendor like Yubi provides the loan.
Companies can use a vendor financing option like Yubi Flow with a low credit score to obtain a business loan and those who do not want to pay for goods or services in cash upfront.
It is a business model in which lending institutions provide loans to borrowers rather than vendors themselves.
If a business needs its working capital intact & is thus unwilling to expend it or facing a liquidity crunch, then the vendor financing is the best possible option. A business can also avail this type of financing if it is unable to avail of a business loan.
Buyers may need to put up their equipment, inventory, or other assets as collateral to avail a certain amount of finance.
Given that the business deal occurs between vendors and buyers, business can avail larger credit values than what can be availed via lending institutions.
Businesses with proper cash flow & health financials and having a good business relationship with their vendors are eligible for vendor finance.
A certain amount as down or upfront payment and some collateral may be necessary to avail of vendor finance.
Rate of interest is quite nominal and ranges between 5 % to 10%. The rates however depend a lot upon the buyer’s financials, invoice amount, cash flow, and credit score.
Repayment periods range between 1 month to 24 months.
Yes, collateral may be necessary and business may need to put up some of their assets as security.