A Financial Solution With
Vendor finance is the provision of a loan from one company to another so
that goods can be purchased from the company providing the loan. Vendor
finance has a number of advantages which include:
- The vendor increases their sales.
- The vendor earns interest on the loan which is usually higher than that available from other financial institutes.
- The vendor has a firm business relationship with the borrowing company.
- Sometimes the purchasing company also provides shares in their
company as security, thus the vendor gains a hold of the purchasing
- Vendors often imbed the financing within the total solution as opposed to add on packages.
- Price sensitivity is reduced so the purchase becomes more attractive.
- The purchaser is able to buy goods that they would otherwise be unlikely to be able to afford.
- The procurement process is sped up as the purchaser does not need to search for financing.
- The purchasers cash flow is eased as they have a fixed payment to make over the next three to five years.
- During the underwriting and funding process the lending company
receives an approximation of the credit worthiness of the borrowing
- Some vendor finance arrange for the lease of products as opposed to
full payment. This is tax effective for the purchasers. They can also
hand back the product at the end of the contract.
There is one giant disadvantage as any company
requiring a loan to purchase their much needed products could well have
financial problems. This means that there is a risk that the loan would
be written off and the accompanying shares be worth very little.
There are financial institutes who specialize in
providing vendor finance facilities to blue chip companies, working as a
third party. Other financial consultancies specialize in arranging and
negotiating vendor finance schemes for small and medium sized
This involves seeking potential purchasers, matching
them with vendors and arranging the finance for the pair of them. They
obviously receive a commission for this activity.
During recessionary times more companies seek vendor finance to solve their liquidity problems.
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