Vendor Financing

When most business owners think about vendor financing they think about trade finance meaning that a supplier or vendor allows the business to purchase its products via an informal credit line.

For example, your business purchases $10,000 in goods from a major supplier and based on your business's long-term relationship with that provider, the supplier or vendor may allow you 20 days to pay for those goods.

This 20 days (could be 10 days or as much as 60 days) allows your business time to convert those goods into finished products that can then be sold to customers. Thus, if your business's customers pay you for the finished product before the 20 day period is up, you can use those funds to pay off the supplier - essentially buying needed materials at zero or little cost to the company.

Businesses and their suppliers have been conducting this type of informal financing for decades. The purchasing business benefits because it is allowed a grace period to pay for those material and the supplier benefits as it keeps its customers (your business) happy and coming back for more.

Recently, however, there has cropped up a new form of vendor financing.

This new form is where a vendor or supplier provides money directly to one of its customers in the form of a business loan and requires the customers to use those funds to purchase the supplier's or vendor's products.

Example, Microsoft has recently been providing some of its less than financially strong customers (customers who are either hampered by the tight credit market or just cannot get financing elsewhere) actual loan money so that these customers can use those funds to purchase Microsoft's products. Thus, for businesses needing to add additional software products or upgrade to newer versions, this might just be a simple way of doing so without depleting necessary cash on hand.

Vendors and suppliers are doing this for several reasons in lue of traditional trade financing as mentioned above:

First, it helps the vendor's sales volume. Instead of selling good on credit terms and simply increasing accounts receivables, the vendor actually receive hard cash for the sale (even though it is their own money); cash that immediately flows through to the bottom line.

Second, it provides the vendor an additional stream of revenue in the form of interest income and fees. Do know that if your business is approved by a merchant for a vendor financing loan, there will be interest and fees involved just like traditional business loans and, since most of these borrowers cannot get financing elsewhere, the interest rate and fees may be higher than other business financing options.

Lastly, when vendors are facing slow demand for their products (especially in recessionary times) vendors can use this type of arrangement to ensure that its 1) keeps its current customers base (by providing those businesses who may really be struggling a means to continue to purchase THEIR goods) and 2) can attract new customers (either start-up businesses or established players who frequent competitors) by offering them quick and simple financing.

Image if your business was having cash flow issues and struggling to keep necessary levels of inventory or material in the business due to our current economic slow down and was offered an immediate financing option to help keep your business afloat - hopefully long enough until the market turns around.

While there are pit falls to this type of business financing; just like any type of financing, businesses may find that these vendor loans are just the ticket to keep them in the game until the market really beings to recover for Main Street businesses.

But, with all financing, it is always best for the borrower to consider all options and weigh the pros against the cons. Financially sound management will then choose the option that offers the best benefits for the company with the least amount of risk and cost.

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