A vendor loan can be a possible option for businesses that want to grow without depending on lenders, using existing relationships with suppliers to open different borrowing options. Vendor financing refers to the loaning of money by a vendor to a customer who uses the money to buy the vendor's services. These types of loans come with high-interest rate than offered by any other banks. This rewards vendor for the high risk of default. Usually, most of the companies choose vendor financing when purchasing essential good which is available at the vendor's warehouse. The arrangement of vendor financing helps in enhancing the relationship between customer and vendor, as it results in mutual benefits. Scroll down to check more information regarding Vendor finance or loan and Vendor Agreement.
What is Vendor Finance?
Vendor Finance involves a vendor giving money to their customer, who will use the money to buy goods and services from the vendor. It is mostly used when a supplier sees a valuable relationship with the customer, who does not have the cash flow to buy goods or services regularly without some form of finance in place. So that's why it is always prior to establishing a relationship between the vendor and borrower for vendor finance agreement being made. Also, vendors offer this type of loan to earn interest which is paid by the customer, although vendor loan or financing without any interest is also possible.
Usually, financial institutions are not ready to give money for a business loan and commonly are in favor of providing vendor finance to their consumers. This facility provided by the financial institutions can be used at both the stages, i.e., manufacturing stage or post-manufacturing stage.
There are some features of Vendor Finance, as mentioned below:
It provides flexible repayment options.
Turnaround time and quick sanctioning.
Less and hassle-free documentation.
Vendors earn a rate of interest on the funded amount.
Works on MOU (Memorandum of Association) between bank and company.
Committed relationship manager by a few lenders.
The loan depends on business requirements.
Short-term working capital loan
Provide credit facility to large corporates or vendors.
Security in the form of invoices or bills which is accepted by the corporate.
There are two types of Vendor Finance:
Debt Financing: In this financing, the borrower receives the services or products at a sales price along with an interest charge.
Equity Financing: In equity financing, the vendor provides goods and services in exchange for a fixed amount of the company’s services, property, inventory, stock, etc.
What are the benefits of Vendor Finance?
Following are some of the benefits of Vendor Finance:
Sales increases as customers tend to purchases more and more.
Vendors earn interest from the amount borrowed by the buyers.
Limited lenders offer vendor finance without security.
Higher negotiating option with a vendor.
Without worrying about the funds, buyers can free to purchase inventory.
If the buyers having low or bad credit score can also get vendor finance quickly as compared to the business loan.
What are the essential documents required for Vendor Financing?
Following are some vital documents required at the time of Vendor Financing:
Duly signed and filled application form.
Submit the latest passport-sized photographs.
Submit all the essential KYC documents.
The balance sheet for the last two years.
Address proof of the business.
Previous year Loss or Profit statement.
The bank account of the last 12 months or one year.
Copy of agreement, contract, or purchase order between the vendor and the principal for the supply of goods.
Audited financials with income proof.
Details of business profile and projection.
How does a Vendor Finance work?
Usually, in a vendor loan, the customer will pay a deposit to the vendor in exchange for the loaned amount, which will be paid back after a time along with the rate of interest applied on it. The vendor Agreement depends upon the individual vendor and the sale being made. Still, the rate of interest for the vendor loans range from 5% to 10%, and the interest rate will be added to the regular repayments until the loaned amount has been fully returned.
If the borrower is getting credit in this way, then he or she doesn't depend on other financial institutions for borrowing money such as banks and they do not require to meet any of the requirements for lending money. The trade-off for this will be higher rates of interest than banks, or any other lenders might charge. At the same time, some of the vendors purposely keep their rates of interest low to new business and secure good benefits over simple suppliers.
For example, suppose if ABC wants to purchase any of the inventory from XYZ at the cost of Rs. 10 Lakhs, but ABC has not enough money to pay the full Rs. 10 lakhs to XYZ and it can only pay Rs. 3 lakhs in cash and must borrow the rest Rs. 7 lakhs. Then XYZ is willing to enter into a vendor financing arrangement with ABC for the remaining Rs 7 lakhs. XYZ charges a 10% interest rate and requires the debt to be paid within or before 24 months.
What is a Vendor Agreement?
A Vendor Agreement is a type of agreement that states the provisions of work and conditions that are to be performed by the vendor. The main points involved in the Vendor Agreement is the date, time, and location where all the services should be provided. In India, there are several cases in vendor business where he or she may require a document of the Vendor Agreement. A Vendor Agreement is generally made when the business of an individual is small, and they have a pair of products or services for sale.
Conclusion
Vendor financing becomes one of the most popular financing options with both sellers and buyers, and it can be arranged needed for a business sale to go ahead. For any queries related to the Vendor Finance Agreement, contact an expert at Swarit Advisers.