Vendor financing is a type of seller financing that involves the vendor lending out money to a buyer or borrower in the buying of the vendor’s services or products. This is called trade credit by people sometimes. This type of seller financing is always taking from the vendor in a form of deferred loan. In this type of financing too, there are sometimes the inclusion of transferring of shares of the borrower or the company that borrows to the vendor maybe as a collateral.
This financing gets rampant or common especially when a vendor gets to know a value that is high in the business of the customers and a relationship in the business better than the value sees by the traditional financing or lending companies or institutions. In this type of financing, the interest rate accrued to the borrower is usually more and higher than the interest rate which is charged at bank.
The mortgage payment is also high since the credit score is not usually considered as people with low credit score can do this.
Vendor financing Breakdown
Vendor financing is a seller financing that assist people and corporations in the purchasing of goods and services that are considered to be essential without necessarily turning to banks for help or getting their personal funds and assets as collateral. The vendor financing is used by business owners purposely because it can be used as in the establishment of a credit history and preservation of bank financing till when it can be important like for improvement of capital for the boosting of the company’s revenue.
For the vendor financing to be successful, the relationship between the vendor and the borrower must be well established. Collection of cash for the sale of services after it has been agreed upon is not really ideal and good, so it is better not to make the sale of the services at all.
The vendor can be able to earn an interest sometimes on the financial services and there might not be interest at all which makes the vendor financing to be equated to deferred payment. When vendor financing is being offered, there are some competitive advantages it amounted to for the big ticket items seller. That kind of credit use in the vendor finance is known as the open account.
There are many forms of vendor financing which can be based on the basis of service provider (maintenance companies, security companies, management of payroll companies), on the basis of common providers (equipment’s manufacturer, suppliers of parts) and can also be on the basis of suppliers of BTB, Business to Business (warehouse for building supply or company for office supply).
Vendor financing types
There are two major type of vendor financing which are the equity vendor financing and debt vendor financing. Equity vendor financing makes the chance and availability of exchange of goods and stocks between the owner of the company and the investor.
This is more rampant among the new businesses that are just starting. This new business is mostly known to use inventory financing which is a form of vendor supplied financing and they have their collateral replaced with the inventory or they use the inventory as the collateral for the loan which is usually short term. The debt vendor financing has the process of agreement between the borrower and the vendor that there will be a particular interest rate on the inventory bought.
The extra charge on the price of the inventory for the borrower is the interest charge. There are two main types of interest rate which can be variable interest rate and the constant interest rate. The variable interest has the interest rate to change from time to time while the constant interest rate has the interest rate on the inventory to be till the end of the agreed term.
The vendor financing is also used in the business startup as a result of the inability to sponsor the business by the owner or does not have enough money to start the business by the individual or the entrepreneur. The vendor may have a share in the starting of the business or may provide financial services to the individual with the aim of having interest from the loan given.