If you are a small business owner, then you would probably have heard
about vendor financing. Someone may have talked to you about it and even
invited you to try and avail of one. Of course, as a prospect, it is
right for you to be guarded and inquisitive before you try getting such
kind of help from financial institutions.|
Definition of Vendor Financing
What exactly is vendor financing? Simply put, it is a financial and legal arrangement between a business and a supplier. In some cases, it is agreed upon by a business and an existing provider of products with which it has no relationship at all.
If you are into a retailing business, for example, you are bound to have a supplier's contract with a certain company. Under this arrangement, you can be extended vendor financing from your supplying partner. This usually happens when the entrepreneur wants to expand his or her operations. He or she would need to procure a higher amount of supplies for that, making the supplier an ideal source of financing rather than banks.
Benefits of Vendor Financing
It is somewhat a win-win situation for both the vendor and the supplier. When the enterprise grows in size, this would mean that the supplier earns more revenues as well since it is his or her business that provides for the other firm. There is much interest in the growth of the borrower from the supplier's side, which could lead both parties to go into vendor financing.
Another instance where an existing business may want to seek vendor financing is when the business has cash flow problems, and you would have difficulty acquiring the products that you need to sell to sustain your existence. In this case, since you have a supplier, you simply need to ask for a loan, credit, or any form of financing from the latter for the things you need.
How Does It Work?
Vendor financing works exactly just like other forms of loans, except that you're not going to be dealing with professional lenders. Under the terms of the agreement, the business will pay the vendor off through monthly payments for a specific period of time. This monthly payment is also endowed with interest. The amount that the company extends as financing is a fixed amount. That amount is arrived at through negotiations.
In some cases, there are companies that will agree to extend vendor financing without requiring the company to make monthly payments. In this case, the lender will negotiate for part ownership or a stake in the borrowing company. The lender, however, does not acquire any controlling interest in the company in this arrangement.
How to Decide on Vendor Financing
Vendor financing is, in its core, a loan. This means that it counts as an expense in your balance sheets. This also means that you should take steps to make sure that the financing you are getting is worth the money that you are going to spend for it.
When negotiating vendor financing deals, you should take the time to look at the details: interest rates, terms and conditions, as well as the package they are offering.