Your business relies on cash flow to keep the doors open, but cash flow is not always consistent from one month to another. For business owners, that means finding ways to manage their cash flow, which includes working capital financing. But there are other options available, such as vendor financing. Let’s explore what it is and the pros and cons it can have for your business.
What is Vendor Financing?
This is a financial term that describes the process of a vendor lending money to a customer, who then uses those funds to buy items from that vendor. It can sometimes be referred to as trade credit. These are essentially deferred loans from your vendors. These loans can help you to get materials or services needed to keep your business running but also typically come with a higher interest rate than a loan from traditional funding sources, such as a bank.
This type of financing can help your business by spreading costs out over a specific time frame instead of putting a lot of pressure on your business to come up with the capital immediately.
The Benefits of Vendor Financing
Vendor financing can offer several advantages, including allowing loan recipients to grow their credit history while not requiring that your business put up personal assets as collateral.
Vendors will often see a higher value in your business than traditional lenders, which can lead to a relationship between the owners. For your vendor, it is not ideal for them to provide products or services without receiving immediate payment. The result is that they are willing to create terms with their customers to collect payments over a defined period and charge interest to compensate themselves for the delay in receiving funds. Making a sale with delayed payment is better than no sale at all.
What are the Types of Vendor Financing
Debt vendor financing means the borrower agrees to pay a set price for inventory with an agreed-upon interest rate fee. If the agreed-upon amount is not repaid over time, it will be written off as bad debt. There are several different ways that a vendor can structure debt or equity payments.
Equity vendor financing is typically more common when you are discussing start-up companies. The vendor provides goods or services in exchange for a predefined amount of stock in your company. Inventory financing is a type of vendor financing that uses your current inventory as collateral while giving you terms to repay the loan to release your collateral. Your vendor might allow you to have a line of credit, allowing your business to pay off invoices over time and still have access to what you need in terms of goods and services.
Vendor financing can allow a vendor to secure the business from your company by lending you capital, essentially strengthening the relationship between your businesses.
With multiple types of vendor financing available, your vendors can provide options that will fit the needs of your business. However, it is important to review how you are using vendor financing. After all, you can end up overextending your company’s finances.
If you are looking for financing to provide working capital for your business needs, our team can help you find the right funding. Contact us today to learn more about your financing options.