Vendor Note

What is ‘Vendor Note’

A type of debt instrument used in a particular type of short-term loan agreement in which the seller of goods or merchandise sells them to the buyer, but also provides financing for the buyer in the form of a vendor note. The loan is secured by the inventory being sold to the buyer as well as pledges of the buyer’s business assets and similar forms of security used to help lessen the perceived risk of the buyer’s default.

Also known as a seller note.

Explaining ‘Vendor Note’

Vendor notes can be a useful and convenient form of financing, particularly when well-established sellers with diverse customer bases are taking on new, smaller buyers who typically have small amounts of working capital with which to purchase inventory. The use of vendor financing can make it easier for a company to increase its sales volume, but in doing so it also incurs the risk of the buyers it finances not paying back their loans.

Vendor notes vary in terms of their time to maturity, but notes with time horizons in the range of three to five years are considered common. Many different types of terms and conditions can be built into a vendor note, such as limitations on the types of business practices the buyer can engage in, restrictions on acquiring other inventory or business assets and requirements that specific financial ratios or benchmarks be maintained.

Further Reading

  • Enterprise risk management: a DEA VaR approach in vendor selection – [PDF]
  • Vendor–buyer inventory models with trade credit financing under both non-cooperative and integrated environments – [PDF]
  • Operational decisions, capital structure, and managerial compensation: A news vendor perspective – [PDF]
  • A note on “Modelling an industrial strategy for inventory management in supply chains: the 'Consignment Stock'case” – [PDF]
  • Vendor-managed inventory with consignment stock agreement for single vendor–single buyer under the emission-trading scheme – [PDF]
  • Another look at the single-vendor single-buyer integrated production-inventory problem – [PDF]
  • Consignment and vendor managed inventory in single-vendor multiple buyers supply chains – [PDF]
  • Developing economic order quantity model for non-instantaneous deteriorating items in vendor-managed inventory (VMI) system – [PDF]
  • Note on: An integrated vendor–buyer cooperative inventory model for items with imperfect quality – [PDF]