Vendor finance is a type of lending arrangement in which a vendor provides a loan or a line of credit to a client. Typically, this type of financial arrangement provides benefits for both parties. Clients can make use of the loan or line of credit to make purchases quickly and easily, while paying interest rates that are competitive with other lending options. Vendors benefit from minimizing competition from competing businesses that either do not offer a vendor finance option or have a credit plan that is inferior in some manner.
As with any type of lending arrangement, clients must meet the qualifications or requirements that are related to the vendor finance. This includes having and maintaining a credit rating that the vendor considers acceptable, and being able to demonstrate the ability to repay the credit or financing according to the terms and conditions related to the extension of the credit. Just as with other types of lending, the client will sign a binding agreement that helps to provide the basis for the ongoing working relationship.
For customers, the vendor finance option is often an excellent situation that makes it possible to make better use of the business revenue stream. It is not unusual for companies to utilize this type of financing in order to obtain supplies for the core business operation and defer payment for those supplies until the resulting goods and services are sold and paid for by the company’s clientele. In the interim, any interest charges that are assessed on the outstanding balance are likely to be within the same range as interest rates that could be obtained from other sources, allowing for the current credit rating of the business.
Vendors can also enjoy benefits from the extension of vendor finance plans to select customers. The ability to place orders and defer payments to a later date can often be the incentive customers need to purchase products from the vendor rather than doing business with competitors. Assuming that the working relationship remains cordial and mutually beneficial over an extended period of time, the degree of loyalty that is generated may also aid the vendor in keeping that client even when someone else offers lower prices but no financing options.
Typically, a vendor finance arrangement will include repayment terms that require remitting at least a minimum amount each billing period. At times, vendors may offer additional incentives, such as a discount when the entire balance is paid off by the due date. In any case, this type of revolving credit or lending situation is often attractive to clients as well as lucrative for vendors, allowing everyone involved to benefit from the finance option.
