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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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