What is Vendor Financing?
Vendor financing is a type of financing in which a company or vendor provides financing to a customer to purchase their goods or services. This is commonly used to accelerate sales cycles for the vendor by becoming a one stop shop for the goods or services, or when traditional financial institutions are unwilling to provide financing due to customer or business environmental credit conditions.
Businesses with a variety of credit scores can benefit from vendor financing. It can be a good fit for a company that needs unique loan terms and conditions, an out-of-the-box payment structure, unique variance in documentation, or flexible credit terms.
So, How Does Vendor Financing Work?
You, the business owner or CFO, applies for financing, specifying how the money would be used, how and when it would be repaid, etc. The funds provided for the lease or loan are then used to buy the vendor’s products and/or services.
Once you enter into a vendor financing arrangement and perhaps make an initial deposit or payment, the balance of the lease or loan is paid over an agreed term with regular repayments.
Vendor Financing and Obtaining Capital
There are multiple ways to obtain capital:
Lease financing is a type of financing where a lender (lessor) provides equipment, property, or vehicles to a borrower (lessee) for a specified period of time, in exchange for regular payments. At the end of the lease term, the lessee may have the option to purchase the equipment or property for a pre-determined price.
Loan financing, on the other hand, is when a lender provides funds to a borrower, who then uses the funds for a specific purpose, such as buying property or equipment. The borrower then repays the loan, plus interest, over a specified period of time.
In summary, in a lease, the borrower uses the asset while the lender retains ownership, while in a loan, the borrower receives the funds and becomes the owner of the asset.
In addition to the above options, some vendor finance solutions, particularly for challenged credit, may include a combination of the above options as well as warrants, equity, or other innovative finance solutions. These creative vendor financing options can help businesses purchase essential equipment for a firm without a strong credit standing or credit history. In addition, there tends to be more flexibility and a greater ability to provide customized financing. This can be helpful for new or pre-revenue businesses, an expanding business, or a business in a turnaround phase. These creative vendor financing solutions may include flexible terms like short or long leases or innovative structures like step-up or step-down payments.
Example of Financing of a Growth Company
Company G is all about growth. Company G wants to expand its business with a new product offering. They have a solid business plan, are knowledgeable in the industry, and have plenty of interested clients. However, Company G needs more funding to purchase the equipment required to produce the product. In such circumstances, a traditional bank may not lend to them because revenue will take time to ramp up.
On the other hand, a creative vendor financing company realizes that Company G’s new business plan has a high-profit potential. It offers Company G an innovative vendor financial solution that includes a step payment where his monthly payments start low and increase over time.
Company G now has access to capital to make its business dream a reality. It successfully builds the business and pays off the lease or loan over several years. Now that Company G has expanded with the new product line, it has the monetary stability of a strong business. Traditional lenders will now happily work with them if they need a conventional business finance solution.
Benefits of Vendor Financing to the Purchaser
Flexibility is the key benefit. Finding a finance solution that meets a company’s unique needs can be difficult. Whether it be a pre-revenue situation like Company G or a company with limited credit history, overcoming the obstacle is time-consuming. In addition, finding financing takes time away from other critical business demands. Creative financing accelerates the process and solves these problems, thereby creating more opportunities for the company.
NFS Leasing: The ‘Story’ Credit Lender
NFS Leasing funds the equipment and project needs of early-stage, turnaround, and high-growth firms and works closely with equipment manufacturers, dealers, and vendors. With over $1B in capital deployed to companies requiring funding beyond the limitations of traditional lending, we are committed to digging deeper, getting creative, and solving the problems that empower businesses, like yours to capitalize on market opportunities.
Let’s talk if you have a piece of equipment, a project, a client, or a particular vendor financing need.