How can Vendor Finance help you and your business?
Sometimes you need to purchase some goods in order to start up your business but your start-up capital is not enough. You have been to the bank and other private lenders but you are not eligible to collect any loan. This could be devastating. It is just some amount of money standing between you and your dream. You are at a point where you don’t even know what to do. If you fall among this category of people, Well! Have you heard of vendor financing?
What is Vendor Finance?
Vendor financing involves a company lending money to a customer. It entails a vendor lending a customer money for the purchase of an inventory or property. For instance, a customer A needs to purchase some products from a company B worth over 250 million but the customer A only has 350,000, so therefore, the company B lends him the remaining money to purchase their products. Vendor finance involves an agreement between the customer and the vendor. The company might require a collateral or an equity in which you use an asset of yours. It can take as long of 30 years depending on your agreement between you and the company. Another thing is that the interest rate is usually higher than when you get a loan from a bank.
Is it legal?
This is not an illegal means, there’s no cause for alarm! It is very much legal. State and federal government enactment give legitimate structures that administer vendor finance. Obtaining a property or inventory where the vendor gives finance is lawful when directed effectively. As a standard guideline, private proprietors can regularly move their properties through vendor finance legitimately, as long the organization possesses either a real estate permit or a credit permit, based the kind of transaction being attempted.
Types of Vendor Finance
Vendor finance can be carried out in two ways. We have debt financing and equity financing:
Debt financing involves the borrower agreeing with the company lending to pay a sum of money for the inventory as a repayment of debt with an interest on it within a stipulated period of time or it would be written as a bad debt- a debt that cannot be recovered. When this happens, the borrower would never be able to engage in vendor financing agreement with the vendor again.
Equity Financing, on the other hand, involves the vendor giving its products required by the borrower in return for a concurred measure of the borrower’s stock. Since the vendor is paid in offers, the borrower does not have to make money reimbursements to finance the purchase of products. The vendor turns into an equity investor and takes an interest in the sharing of profits. The vendor practically owns apart of the borrower’s company. Additionally, the vendor can make major decisions in the borrower’s company. Equity vendor financing is usually common with new businesses that are yet to fabricate a record of loan repayment with the customary money lenders.
Any of the above types of vendor finance can be utilized depending on what the company is prepared to do.
Vendor Finance benefits
Vendor financing is kind of like a deferred loan, it has a few components such as interest rate, repayment, borrower, vendor/lender, speculated period, collateral and so on. It also has a few requirements depending on the terms of the vendor. For instance, the vendor may require a collateral that would stand in place of the debt such that failure to repay within the time of agreement might lead to seizing or transfer of ownership to the vendor.
However, vendor financing stands to benefit both the lender and the borrower.
Benefits of Vendor Financing to the vendor
- The vendor can gain half-ownership of the borrower’s based on the agreement.
- The borrower is desperate because vendor financing is his/her last option, the borrower is not even eligible to collect loans from the bank. You can inflate the repayment price and interest rate.
- The vendor has right to take over the borrower’s company or property depending on agreement between the borrower and the vendor.
Benefits of Vendor Financing to the Borrower
- The borrower can startup his business without paying anything.
- He can repay his debt with the profits of the business.
- A good alternative to request of loans from a bank or any other private lender which might take a long period of time before approval considering the number of things that should be in check.
Talk to a Professional!
Vendor finance can be a very good way to start a business, especially when you don’t have enough money to start up the business. However, it is also very risky to indulge in without a correct backing. What you need is a financial expert like MHF.
We have a lot of experience when it comes to vendor financing. MHF works with both manufacturers and purchasers to establish vendor finance arrangements with financiers.