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Vendor finance is offered to vendors and traders to assist them in fulfilling the cost of products, inventory, and property. It is a short-term loan facility to ease the financial pressure on vendors. Also known as trade credit, individuals can get this facility to fund the purchase of their products or equipment to support their business. Vendor finance can be used at any stage of the business, i.e. during manufacturing or post-manufacturing. The financial offering can be a good option when a business loan may not be the best choice.

Features of Vendor Finance

  • Credit facility offered to vendors

  • Great short-term working capital

  • Credit disbursed depending upon the business requirement

  • Quick capital sanction

  • Minimal documentation

  • Hassle-free lending process

  • Dedicated guidance through the lending process

Types of Vendor Financing

There are two types of vendor financing options that you can take:

  • Debt Financing: The borrower will pay interest on the borrowed sum to the vendor

  • Equity Financing: The vendor will lend the stock and inventory in return for the borrower’s company shares

Example of Vendor Financing

A working capital loan, unlike a traditional Business Loan, is majorly driven by a favourable relationship between the lender and the customer. Vendor trade loans involve a very high risk of default, and this is one reason why the interest rate charged against this type of financing is relatively higher. Here is an illustration that will help you understand the process better:

 

Let us assume that Raj wants to purchase business inventory from Rakesh. The value of the inventory is ₹10 Lakhs. However, Raj has only ₹4 Lakhs to offer and must borrow the remaining funds. In this case, Rakesh will enter a financing arrangement with Raj and a financial institution willing to lend the remaining ₹6 Lakhs. The financial institution will lend ₹6 Lakhs and charge 10% interest on the borrowed sum. The total sum must be repaid within the next 12 months. Also, Raj must surrender the inventory against the borrowed credit in case of default.

Benefits of Vendor Finance

Vendor finance carries innumerable benefits, making it a preferred choice among traders. Some of the most notable benefits of getting the type of finance include:

  • A considerable increase in sales as customers are likely to make more purchases.

  • The buyer does not have to worry about funds when purchasing inventory.

  • Easy processing and lesser documentation.

  • Flexible repayment options; borrowers can avail of a credit limit of up to 90% of the inventory value.

  • Borrowers enjoy a higher negotiating power.

  • Equity vendor financing is a form of deferred payment. The vendor will obtain returns based on the shares of the borrower’s company. This essentially means that borrowers do not have to pay any interest on the borrowed sum.

  • Vendor finance is sanctioned even to borrowers who do not have a good credit score. This is not the case with other financing options like Personal loans.

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Documents Required for Vendor Finance

When applying for vendor finance, one must submit the following documents:

  • A filled application form is given by the lender

  • Balance sheets (from the last 2 years)

  • Audited financials with income proof

  • Last years’ Profit and Loss statement

  • Last 12 months’ bank account statement (operative account)

  • Copy of agreement, contract, or purchase order between the Principal and Vendor for supply of goods (If any)

  • 2 passport-sized photographs

  • Proof of the business address

  • Information regarding business profile and projection

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FAQs on Vendor Finance

What is the interest rate levied on vendor finance?

The interest rate levied on vendor finance varies depending upon the business requirement.

Can I get vendor finance with a bad credit score?

Vendor finance can be taken with a considerably lower credit score. However, it depends upon the lender, and the interest rate is likely to be much higher.

What is the maximum loan amount offered through vendor finance?

The loan amount offered through vendor finance depends upon the business requirement and the buyer’s credit score.

What collateral has to be submitted when obtaining working capital under vendor finance?

If you obtain working capital under vendor finance, you have to submit collateral in the form of hypothecation of your current assets or the purchased inventory. However, this aspect depends upon your profile and lender.

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