What is Vendor Financing?
Vendor financing is lending to a customer.
How Does Vendor Financing Work?
Let’s say you plan to purchase inventory from Company XYZ for $2 million. You only have $200,000 in cash and want to pay Company XYZ over time for the rest. Company XYZ offers to lend you $1.8 million at 5% interest to make the rest of the purchase. In many cases, the vendor might require collateral (i.e., the inventory or a claim on your cash accounts, for example) to ensure that you pay.
Why Does Vendor Financing Matter?
Vendor financing is a great way to acquire inventory, but it usually requires a solid relationship between the buyer and seller. From the vendor's perspective, it may not be paid for a sale right away, but receiving the cash over time is often better than not receiving it at all (plus, they receive interest on the loan). When vendors are selling high-price items such as cars to auto dealers or medical equipment to hospitals, vendor financing becomes a crucial sales advantage.
In some cases, new buyers are especially dependent on vendor financing if they cannot qualify for bank loans or other financing to acquire inventory.