Posted in Finance, Accounting and Economics Terms, Total Reads: 550
Definition: Vendor Finance
Vendor Finance is a form of a loan provided by a vendor usually a company to a borrower (usually another company) to buy the goods from the vendor providing the loan. The vendor company can also lend to a customer so that the customer can buy the company’s products.
The loan is usually in the form of deferred payment terms or shares subscribed by the vendor. In some cases interest is charged on the money while in other cases it is vice-versa. Large credit worthy buyers do not normally make use of vendor financing since they will be able to borrow money at much lower rates from other sources. New buyers are therefore dependant on vendor financing if they do not qualify for bank loans.
Vendor Finance is normally based on the terms and conditions of the contract of sale. If vendor financing is used, the title of the property remains in the name of the vendor until and unless all the repayments are made and all the obligations stated in the contract are fulfilled.
Vendor Financing increases the sales of the company. It also increases the revenue through interest earned from the borrower. Vendor Financing may also lead to bad debt loss. This means that the companies or the consumers, the vendor is lending to, may not be financially stable and hence may never pay back the money. This may lead to credit risk for the company because the credit history of the company /customer accepting the loan may or may not be good. So, before vendor financing it is important to maintain a solid relationship between the vendor and the buyer.
Vendor Financing is most commonly used for large scale apartment developments.