What is Vendor Financing?

Vendor Financing

Vendor financing is extending a loan to the buyer, in which the company gives money to the borrower to buy its product or property. Vendor finance is in the form of deferred loans or shares bought by the vendor.

Let us see how it functions with an example

Let us assume you are planning a startup with an investment of 40 Lakhs. You have 10 Lakhs in hand and require another 30 Lakhs for starting the business. The lender will pay the rest of the amount at an interest rate per current market conditions. Availing the finance you will start the operations. In many incidents, the vendor asks for a collateral security (in the form of the inventory) to make sure you pay the rest of the amount promptly.

Why it matters?

You can easily buy a property or product, but under such terms. There should be greater understanding between the buyer and seller. From the vendor’s point of view, it is not an advance to buy the property, but receiving the cash over a period of years with the interest. As a buyer, you should repay the amount properly mentioned in the agreement. Vendor finance is suitable for high end purchases like selling cars to automobile dealers or financing medical instruments for hospitals. In simple extending loans to buy high end products or properties works well for vendor finance.

In some cases, the new buyers have to look for the vendor’s mode of financing. Since, they cannot get a loan from a bank or financial institutions to buy the property. It is known in marketing circles as dependence.

Vendor finance a stepping stone to finance

Using the vendor finance, you will be able to start or expand on the business, thus making you the absolute owner of it and without having to mortgage to start with. The lender will make an arrangement for the buying of the property over a period of time, thus making you eligible to go for a bank loan. You are the absolute owner of the business without settling the full amount.

Types loan under vendor finance

There are 4 types of loans under vendor finance and they are mentioned below;

• Purchase order finance (PO)
• Short term revolving loan (STRL)
• Term loan
• Loan against assets

Purchase order finance

This is a facility in which you can get finance against the purchase orders for a period of 60 days.

Short term revolving loan

This facility is suitable for those who run a shop against their current assets. The loan is to meet their working capital requirement.

Term loan

A term loan is extended to buyers to expand their capacity against the mortgage of a moveable/immovable property.

Loan against assets for 15 years

This facility is suitable for those who need working capital or looking for expanding the business against the advance of immovable properties.

You can repay the amount in EMIs and with a maximum period of 15 years. The interest rates will change whenever the central bank revises the rates every three quarters.