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Vendor Finance is a type of short-term lending facility through which a company or organization lends money to borrowers for them to buy vendor’s inventory, products, services, or property. Vendor finance is also termed trade credit which takes the form of deferred loans. This lending product is availed by an individual when he/she does not have enough funding to buy an entire range of products and equipment for business. Vendor finance also includes the transfer of shares of the borrowing company to the vendor.
Traditional financial institutions that are unwilling to lend money for business loans, generally are in favor of providing vendor finance to their customers. This finance facility can be utilized at both the stages of production that is manufacturing stage or the post-manufacturing stage.
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Features of Vendor Finance
- Short-term working capital loan
- Credit facility to large corporates (vendors)
- Loan amount depends on business requirements
- Collateral: In form of Bills/invoices accepted by the corporate, hypothecation of current assets
- Quick sanctioning and turnaround time
- Flexible repayment options
- Minimal and hassle-free documentation
- Dedicated relationship manager by a few lenders
- Credit line as per vendor’s financials
- Vendors earn an interest rate on the funded amount
- Works on Memorandum of Understanding (MoU) between Corporate and Bank
Vendor Finance can be offered in form of bill discounting/invoice discounting, working capital loans, and structured finance against confirmed customer orders. This financial facility works more on basis of relationships with customers rather than taking simple business loans or credit from any financial institution. Vendor finance involves a higher risk of default, therefore, to compensate for the risk the interest rate offered by lenders is on the higher side.
Example of Vendor Financing
Let’s assume that X wants to purchase inventory from Y at the cost of Rs. 10 lakh. However, X does not have enough money to finance the transaction. X can only pay Rs. 3 lakh in cash and need to borrow the balance. Z is willing to enter into a vendor financing arrangement with X for the remaining Rs. 7 lakh. Z will charge a 10% interest on the borrowed amount and requires the debt to be paid within the next 12 months. The vendor will ask the borrower to submit its inventory as collateral for the loan to protect against default.
Types of Vendor Finance
a) Debt Financing: The borrower agrees to pay an interest rate on the borrowed amount to the vendor.
b) Equity Finance: Under this type of financing, the vendor provides goods and services in exchange for an agreed amount of the company’s stock, inventory, services, property, etc. In case the vendor did not get cash, it can rather get shares of the company.
Read: Letter of Credit – Meaning, Types, Features and Process
Benefits of Vendor Finance
- Form of deferred payment in which borrowers are not required to pay an interest rate
- Sales increase, as customers tend to purchase more
- Vendors earn interest on the amount borrowed by the buyers
- Buyers are free to purchase inventory without worrying about funds
- Buyers with bad credit scores can get vendor finance easily, as compared to business loans
- Easy process and less documentation, as compared to other financial institutions
- Few lenders offer vendor finance without collateral
- Flexible repayment options with a credit limit of up to 90% of invoices by a few lenders
- Higher negotiating option with the vendor
Documents required
- All required KYC documents
- Last 2 years’ balance sheet
- Business address proof
- Information regarding business profile and projection
- Last year’s Profit or Loss statement
- Last 12 months’ bank account statement (operative account)
- Copy of agreement, contract, or purchase order between the Principal and Vendor for supply of goods (If any)
- Audited financials with income proof
- Any other document required by the bank
Popular Banks & NBFCs offering Vendor Finance in India
- Bank of Baroda
- FlexiLoans
- HDFC Bank
- ICICI Bank
- IDBI Bank
- IDFC First Bank
- IndusInd Bank
- SBI
- South Indian Bank
- Standard Chartered Bank
FAQs
Q1. What is the interest rate offered by the vendor to the borrower or buyer?
Ans. The interest rate offered under Vendor Finance depends on the business requirements and varies from bank to bank.
Q2. What is the repayment period of Vendor Finance?
Ans. The repayment period of Vendor Finance ranges from 30 days to 24 months.
Q3. If I possess a bad credit score, am I eligible to get Vendor Finance?
Ans. Yes, you are still able to get vendor finance but the interest rate offered by the lender shall be on the higher side as compared to other business loans.
Q4. What is the loan amount offered under Vendor Finance?
Ans. The loan amount depends on the business requirements, the applicant’s profile, and the credit score of the buyer.
Q5. Do I need to submit any collateral if I want to take a working capital loan under Vendor Finance?
Ans. Yes, you need to submit collateral in form of hypothecation of your current assets in case of a working capital loan.
Q6. Can the bills and invoices accepted by corporates be submitted as collateral?
Ans. Yes, you can submit bills and invoices accepted by corporates as collateral for your finance.