Vendor Financing


Vendor finance is a form of lending in which a company lends money to be used by the borrower to buy the vendor’s products or property. Vendor finance is usually in the form of deferred loans from, or shares subscribed by, the vendor. The vendor often takes shares in the borrowing company. This category of finance is generally used where the vendor’s expectation of the value of the business is higher than that of the borrower’s bankers, and usually at a higher interest rate than would be offered elsewhere.

Vendor Financing

What is ‘Vendor Financing’

Vendor financing is the lending of money by a company to one of its customers so that the customer can buy products from it. By doing this, the company increases its sales even though it is basically buying its own products.

Explaining ‘Vendor Financing’

This is a sneaky method a company can use to increase sales. It is also very risky, as the companies it lends money to are usually not very financially stable and may never pay back the money. If they don’t pay back the debt, the lending company will just write-down the loss as a bad debt.

Benefits of Vendor Financing

There are several benefits to using vendor financing, both for the purchaser and the seller. Some of the benefits of vendor financing include:

  • For the purchaser:
    • The ability to make a purchase that they may not have been able to afford otherwise
    • Flexible repayment terms that may be more favorable than those offered by traditional lenders
    • The opportunity to build or improve credit by making timely payments
  • For the seller:
    • The opportunity to sell a product or service that may not have otherwise been purchased
    • Increased sales and revenue
    • The ability to establish a long-term relationship with the purchaser, which can lead to repeat business

Risks of Vendor Financing

There are also risks associated with vendor financing, both for the purchaser and the seller. Some of the risks include:

  • For the purchaser:
    • Higher interest rates compared to traditional financing options
    • The possibility of defaulting on the loan, which could result in the loss of the purchased product or service
    • The risk of being unable to negotiate favorable terms or change the terms once the loan has been agreed upon
  • For the seller:
    • The risk of default, which could result in the loss of the sale and the amount owed
    • The potential for disputes or misunderstandings about the terms of the loan
    • The need to devote time and resources to managing the loan and collecting payments

Further Reading