A Complete Guide For Vendor Finance

Terms of use

Terms of Use

The use of this site and the content contained therein is governed by the Terms of Use. When you use this site you acknowledge that you have read the Terms of Use and that you accept and will be bound by the terms hereof and such terms as may be modified from time to time.

All text, graphics, audio, design and other works on the site are the copyrighted works of nasscom unless otherwise indicated. All rights reserved.
Content on the site is for personal use only and may be downloaded provided the material is kept intact and there is no violation of the copyrights, trademarks, and other proprietary rights. Any alteration of the material or use of the material contained in the site for any other purpose is a violation of the copyright of nasscom and / or its affiliates or associates or of its third-party information providers. This material cannot be copied, reproduced, republished, uploaded, posted, transmitted or distributed in any way for non-personal use without obtaining the prior permission from nasscom.
The nasscom Members login is for the reference of only registered nasscom Member Companies.
nasscom reserves the right to modify the terms of use of any service without any liability. nasscom reserves the right to take all measures necessary to prevent access to any service or termination of service if the terms of use are not complied with or are contravened or there is any violation of copyright, trademark or other proprietary right.
From time to time nasscom may supplement these terms of use with additional terms pertaining to specific content (additional terms). Such additional terms are hereby incorporated by reference into these Terms of Use.

Disclaimer

The Company information provided on the nasscom web site is as per data collected by companies. nasscom is not liable on the authenticity of such data.
nasscom has exercised due diligence in checking the correctness and authenticity of the information contained in the site, but nasscom or any of its affiliates or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this site. The information from or through this site is provided "as is" and all warranties express or implied of any kind, regarding any matter pertaining to any service or channel, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement are disclaimed. nasscom and its affiliates and associates shall not be liable, at any time, for any failure of performance, error, omission, interruption, deletion, defect, delay in operation or transmission, computer virus, communications line failure, theft or destruction or unauthorised access to, alteration of, or use of information contained on the site. No representations, warranties or guarantees whatsoever are made as to the accuracy, adequacy, reliability, completeness, suitability or applicability of the information to a particular situation.
nasscom or its affiliates or associates or its employees do not provide any judgments or warranty in respect of the authenticity or correctness of the content of other services or sites to which links are provided. A link to another service or site is not an endorsement of any products or services on such site or the site.
The content provided is for information purposes alone and does not substitute for specific advice whether investment, legal, taxation or otherwise. nasscom disclaims all liability for damages caused by use of content on the site.
All responsibility and liability for any damages caused by downloading of any data is disclaimed.
nasscom reserves the right to modify, suspend / cancel, or discontinue any or all sections, or service at any time without notice.

For any grievances under the Information Technology Act 2000, please get in touch with Grievance Officer, Mr. Anirban Mandal at data-query@nasscom.in.

New

See all

No notification found.

A Complete Guide For Vendor Finance

M1xchange

@M1xchange

January 5, 2023

Miscellaneous

A Complete Guide For Vendor Finance

Vendor Finance (Overview)

Start-ups and small businesses often face liquidity crunch and cash flow challenges, that at times prevent them from accepting new and large customer orders. With vendor finance, small businesses easily obtain trade credit without paying upfront for the goods. The vendor gives a line of credit to its customers based on their rapport to pay for the product after a certain period of time.

What is Vendor Financing?

Vendor financing refers to the lending of money by a vendor to a customer, who then uses the money to buy the vendor’s inventory or service. The arrangement takes the form of a deferred loan from the vendor, and it may involve the transfer of shares from the customer to the vendor. The borrower will not be required to pay for their purchases in full at the time of purchase under the deferred payment. Vendor financing strengthens relationships between vendors and business owners, as it is built on the foundation of trust between the two parties.

Vendor financing arrangement can also be used as a form of deferred credit payment. The borrower will not be required to pay for their purchases in full at the time of purchase under the deferred credit arrangement. They can, alternatively, wait until they sell the finished goods before making the payment.

Types of Vendor Financing

Vendor Financing takes two main forms: Debt financing and Equity financing

In debt financing, the borrower receives the products or services at a sales price inclusive of an agreed interest charge. The interest charge accrues as time progresses. The borrower can either repay the loan or the debt is written off as a bad debt. In case the bad debt happens, the borrower can’t be allowed to enter into another debt vendor financing arrangement with the vendor.

Whereas, in equity vendor financing, the vendor provides the goods or services needed by the borrower in return for an agreed amount of the borrower’s stock. As the vendor is paid in shares, the borrower does not need to make cash repayments.

Features of Vendor Finance:

Vendor Finance is a kind of short-term lending facility through which a company lends money to borrowers to buy vendor’s inventory, products or property. This facility can be availed at both stages of production - manufacturing or the post-manufacturing stage.

Let’s have a look at its features:

Credit facility offered to large corporates
Quick capital sanction
Minimal documentation
Earns an interest rate on the funded amount
Great short-term working capital
Flexible repayment options
Works on Memorandum of Understanding (MoU) between Corporate and Bank
Loan amount depend on business requirements

Benefits of Vendor Finance:

Vendor finance helps startups with limited funds to kickstart their businesses processes. Since they secure the product and financing from the same vendor, therefore the borrowers acquire the loan on better terms, lower upfront costs and ease of access.

The benefits of Vendor Financing to the Vendor:

1. The vendor continues to enjoy interest payments from the business profits even after they sell the company. Even if the borrower defaults on the loan repayment, the vendor reserves the right to sell assets of the company to recoup the unpaid amount or repossess the business.

2. The vendor has the high level of control over the transaction that enables the vendor to obtain a higher sales price.

The benefits of Vendor Financing to the Borrower:

1. In vendor financing, the borrower does not need to use personal funds to finance the asset or business purchase.

2. Flexible repayment options with the credit limit of upto 90% of invoice.

3. Inspite of bad credit scores, vendors still have the chance to get finance easily as compared to business loans.

4. Streamlined process and less documentation, in comparison to other financial institutions.

How does Vendor finance work? Explain with example.

When the vendor and the borrowing company enter into a vendor financing agreement, the borrower is required to make an initial deposit. Once the deposit is received by the vendor and the borrower has agreed to their terms, the vendor will make the delivery of the agreed goods. The borrower gets the privilege to pay off the balance of the loan, plus any accrued interest over an agreed period with regular repayments. The rate of interest may vary from 5% to 10%, depending upon the agreement between the two parties.

Example of Vendor Financing:

Imagine that Krishna Pvt. Ltd. wants to purchase inventory from Parveen Pvt. Ltd. at the cost of Rs. 10 lakhs. However, Krishna Pvt. Ltd. has limited capital to finance the transaction. It can only pay off Rs. 3,00,000 in cash and must borrow the rest. Parveen Pvt. Ltd. is willing to enter into a vendor financing arrangement with Krishna Pvt. Ltd. for remaining Rs. 7,00,000.

Parveen Pvt. Ltd. is charging 8% interest and requires the debt to be paid within the next 12 months. The vendor is also willing to use the inventory as collateral for the loan to protect against default.

Vendor Finance FAQs

Q1. What is the difference between vendor financing and dealer financing?

Ans. In vendor financing, an individual or company who supplies goods or services to the customer finances their order. Whereas in dealer financing, an individual who specializes in the resale of a particular product from the manufacturer offers loans to the customers. Therefore, he/she acts as a middleman between the producer and the consumer.

Q2. What is vendor mortgage?

Ans. A vendor mortgage is a unique kind of mortgage that allows the seller of the property to become the lender for the buyer. However, the buyer would still require to make regular payments to the seller. Generally, the higher interest rate is set by the seller and agreed on by the buyer.

Q3. What is the difference between a lender and a vendor?

Ans. A lender is an individual, a financial institution, a public or a private group, that makes funds available to a person or a company to buy assets or invest into business. A vendor is a person or a company that sells goods or services for a profit. He/she may also lend money to a customer to buy their goods or services.

Q4. Who is eligible for Vendor Finance?

Ans. Your age must be in between of 24 years to 70 years. Your nationality should be Indian, CIBIL score should be 685 or more. Your business must have spent 3 years from the date of registration.

Q5. What is the common documentation required by suppliers in Vendor Finance?

Ans. Details of the business profile and projection, KYC documents, current account Bank Statement of last six months and financials of last 2 years are the common documents required by suppliers in Vendor Finance.

Q6. How does Vendor Finance affect ‘suppliers’ and buyers' relationship?

Ans. A vendor financing arrangement helps enhance the relationship between vendor and customer, as it results in mutual benefits. It maintains transparency between the two parties and enable them to maintain a healthy relationship between the two members.

fintech industry

Disclaimer

That the contents of third-party articles/blogs published here on the website, and the interpretation of all information in the article/blogs such as data, maps, numbers, opinions etc. displayed in the article/blogs and views or the opinions expressed within the content are solely of the author's; and do not reflect the opinions and beliefs of NASSCOM or its affiliates in any manner. NASSCOM does not take any liability w.r.t. content in any manner and will not be liable in any manner whatsoever for any kind of liability arising out of any act, error or omission. The contents of third-party article/blogs published, are provided solely as convenience; and the presence of these articles/blogs should not, under any circumstances, be considered as an endorsement of the contents by NASSCOM in any manner; and if you chose to access these articles/blogs , you do so at your own risk.

Blockchain

20 Jan 2025

Getting Started with Amazon Web Ser...

Harish Kumar Ajjan

Miscellaneous

17 Jan 2025

The Future of Sustainability - How ...

ARC Advisory Group

AI

Equipment calibration is a critical process that ensures the accuracy and reliability of measurement equipment. It involves comparing the equipment's measurements to known standards. Equipment can produce inaccurate results without proper…

Why You Should Hire Node.js Developers for Your Next Project

carol lookwoo..

@carol141

06 Nov 2024

Miscellaneous

When you're looking to build a fast, scalable application, choosing the right technology stack is essential. Node.js is a popular choice for developers, and for good reason. If you're considering hiring developers for your next project, here’s why…

Unlocking the Power of Microsoft Dynamics 365 API for Seamless Business Integration

DynaTech Syst..

@dynatechsystems1

23 Sep 2024

Miscellaneous

Unlocking the Power of Microsoft Dynamics 365 API for Seamless Business Integration In today’s digitally driven world, businesses need flexible, scalable, and efficient systems to stay competitive. One of the key enablers of this transformation is…

New