What is a Vendor Note?
A vendor note is a short-term loan to a customer.
How Does a Vendor Note 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. Essentially, you’re borrowing $1.8 million from the seller, and the seller is 'carrying a note' until you pay back that $1.8 million. The seller will charge interest that may be a rate that is lower, the same as, or higher than what the buyer might get from a bank or other lender.
In many cases, the vendor might require collateral (i.e., the inventory or a claim on cash accounts, for example) to ensure that the buyer pays.
Why Does a Vendor Note Matter?
Vendor notes are a great way to acquire inventory, but they usually require 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 the earned interest). When vendors sell high-price items such as cars to auto dealers or medical equipment to hospitals, vendor notes become a crucial sales advantage.
In some cases, new buyers are especially dependent on vendor notes if they cannot qualify for bank loans or other financing to acquire inventory.