Vendor financing, in simple terms, helps to bridge the gap between the buyer and the seller. A vendor (seller) agrees to lend money to a customer (buyer). The buyers use this money to buy the products or services of the same vendor. Vendor financing is also known as trade credit. More and more companies are resorting to vendor finance systems because of the ease of the process, and the benefits it brings along.
Vendor financing is a beneficial system for both vendors and borrowers. Vendors agree to disburse short-term loans (usually ranging from 30 days to 24 months) to buyers at an agreed rate of interest. These interest rates are higher than those charged by banks, because vendor finance is a riskier business than traditional finance. While vendors get to enjoy regular interest payments throughout the repayment cycle, the buyers or the borrowers (large companies, in this case) get to enjoy the goods/services by paying only a partial amount of the sale price upfront.
So, why should large companies opt for vendor finance, and what benefits do they enjoy from vendor financing? Keep reading to know the answers to these questions.
Though they may have enough cash or the sources to get a bank loan, it is a good idea for large companies to opt for vendor financing because of the following reasons:
When companies opt for loans from banks, they have to pledge their assets as collateral. In the case of vendor finance, vendors agree to sell the stock to the companies for debt, or in exchange for a share of equity in the companies. The stock that the vendor sells to the companies acts as the collateral. Hence, companies don’t have to provide any additional assets in the form of collateral to get the benefits of vendor financing.
Large companies, especially in manufacturing need to invest in heavy machinery and other technologies from time to time. While they may have enough financial resources to fund these purchases, it is advisable they resort to vendor financing for their business-related purchases. This leaves them with enough cash in hand to maintain the working capital needed for the smooth running of their businesses. Thanks to vendor financing, companies have the option to safeguard their assets and working capital for their future expansion and growth plans.
With vendor finance, large companies have the option to buy all the tools and machinery they need upfront, without having to pay for them entirely. In case these tools require repairs or maintenance during the repayment period, the companies can buy upgraded machinery from the vendors at no additional cost. This way, companies can save a lot of money in the long run. They can also keep their liquid cash safe, which means they don’t have to use it for investing in new machines and technology. Vendors help large companies with all their business requirements for a share in the equity, or per the terms already decided between them and the companies.
Vendor financing is definitely quicker than traditional financing. This is because vendors, unlike banks, don’t require a lot of documents to be submitted. New companies with no credit history, or existing debt may face challenges in getting loans from banks. However, they can easily get their business requirements fulfilled through vendor financing.
Vendor finance helps large companies to plan their finances better. When they know that they have assets and liquid cash lying untouched, at their disposal, they can forecast their profitability rates better, and set aside a budget to meet the forecasts every year. When they opt for traditional loans, a large amount of their liquid cash is used for down payments, while their assets are provided as collateral for the loans. This leaves them with a very thin financial threshold to forecast their growth and set budgets for the same.
In the case of bank loans, banks take possession of the collateral (submitted at the time of getting loans) in case of defaulted repayments. This leaves companies at a huge risk, as they are left with no assets to start another venture. However, in the case of vendor finance, companies don’t have to worry about this problem. The equipment, machinery, or stock that companies buy from vendors acts as collateral for the transaction. If for any unfortunate reasons, the company finds itself unable to pay their repayments on time, they still have their assets and cash safe.
Large companies can make use of vendor finance to gain an edge over their competitors. In this method, they have the option to upgrade their machinery or technology, as and when required, within the repayment period. This easy method of finance also gives them the confidence to plan for business expansions, even though they don’t have the money to pay upfront for the latest tools and technology. Access to these latest tools puts them in a better place than their competitors, without any doubt.
Vendor finance is mutually beneficial for the vendors and the large companies, who are the borrowers. If large companies want to make the most of this system and enjoy as many benefits as possible from vendor financing, they should choose a reliable vendor. Choosing the right vendors will help them keep their cash flow in control, safeguard their assets, and plan their operations efficiently.
