Growth and expansion of a business are essential for sustainability and profitability. Small
businesses, however, may not have the sufficient funds to meet their growth and operational
objectives. They thus resort to financial institutions to meet the capital.
Businesses also opt for alternative funding
options like vendor financing or invoice discounting to meet their working capital requirements within 24-72
What Is Vendor Financing?
Vendor financing is a funding arrangement wherein a vendor assists a customer in availing finance
either directly or indirectly. With the help of such capital availed, the customer then proceeds to
purchase the said vendor’s goods or services. It is also known as – supplier finance or trade credit.
In most cases, vendor financing is treated as a deferred credit. Under this financing
option, customers do not need to pay for their purchases immediately. They can do so after the sale of
the finished products.
Typically, such loans accompany relatively high rates of interest, and borrowers may have to pledge
an asset as collateral. Based on the customers’ market goodwill and their relationship with the
vendor, they may extend funds against an agreement and without levying any interest rate.
The reason why vendor finance is rapidly becoming popular among vendors and purchasers can be
understood by taking into consideration the following benefits
Benefits to vendors:
- The final call about loan sanction depends on the vendor.
- Vendors levy interest on the loan value through the course of repayment tenure.
- It provides them with an annuity stream.
- The funding helps to procure goods of high value.
Benefits to purchasers:
- It helps keep the production process uninterrupted.
- The credit availed can be quickly paid off with the help of the profit generated.
- Helps in optimising the production process and increase returns.
- It also benefits those businesses that do not qualify or are not prepared to avail a traditional
Sometimes, businesses undergo a financial crisis because their accounts receivables get delayed or
blocked. To ensure financial crunch does not interrupt production processes and everyday operations,
businesses can alternatively opt for invoice discounting service.
KredX is India’s leading integrated cash flow solutions provider that
helps businesses access working capital by utilising their unpaid invoices within 24 to 72 hours*.
KredX assures a paperless procedure and offers transparent solutions through zero-liability bill
discounting to meet funding requirements easily.
Types Of Vendor Financing:
Vendor financing broadly involves two different methods of funding, namely –
Through this financing option, borrowers can avail goods or services at sale prices, but they are
required to pay interest at a predetermined rate. Vendors thus earn interest with each instalment
If at any time a borrower fails to pay the vendor, he/she is marked as a defaulter. The credit
amount is then written off and recorded under ‘bad debts’.
Equity financing or inventory financing:
In this type of vendor financing, borrowers avail the required goods and
services but in exchange for a set number of shares. In other words, borrowers do not have to pay
vendors in cash under equity financing as they are paid in share units.
As a result, the vendor becomes a shareholder of the firm and receives dividends on the shares
held. The higher this number of shares held by a vendor; the prominent is their influence on
It is mostly small businesses that resort to equity or inventory financing. If they do not find
the idea of availing credit in exchange for company shares convincing, they can opt for invoice
How Does Vendor Financing Work?
In the vendor finance arrangement, a borrower makes an initial deposit post agreeing
to the vendor’s terms. Subsequently, the borrower has to repay the debt within a predefined
Though the payment instalment may or may not be inclusive of interest, both the purchase price and
the repayment amount are much higher than any regular credit. In case interest is levied on the
purchase; the rate will be decided as per the terms and conditions agreed between the two
Businesses often resort to a vendor finance arrangement as the last resort when they
fail to meet the lending requirements laid down by financial institutes.
Example Of Vendor finance:
Let’s take a look at this simple example to understand the process of vendor
A manufacturing company Stars Limited plans to purchase some raw material worth Rs. 1 lakh from a
vendor Kamal. Due to the financial crunch, Stars Limited can manage to pay only Rs. 40,000 for the raw
materials. Owing to the history of transactions and healthy business relation, the vendor agrees to
provide raw materials worth Rs. 1 lakh after taking Rs. 40,000 from the company. He offers the company
a note that mentions the particulars of the transaction and the agreed terms.
The vendor decided to charge 10% as interest on the outstanding dues for the term agreed by both
parties. Through this arrangement, Stars Limited can procure the required raw material from Kamal. The
company must pay back the remaining Rs. 60,000 in instalments in addition to the interest amount
charged at the rate of 10%.
Several benefits accompany the arrangement of vendor financing, but it has its
shares of limitations as well. Businesses must make it a point to weigh the pros and cons of this
arrangement before going ahead with it.
Businesses can always resort to convenient digital funding options. KredX, provide invoice
discounting services to help businesses meet their working capital needs within 24-72 hours*.
We use advanced technology and thorough data analysis along with credit underwriting skills to provide
you with timely funding. Get in touch with us to learn more!
A. A vendor is anyone who sells goods or services. He/she can be a business owner, an
entity or the government.
A. Often extending credit to businesses going through a massive financial crunch can
lead to default. The shares of such companies will also not prove beneficial in case
they go bankrupt.
A. Businesses can opt for this option when they need to purchase goods or service for
their business venture without using working capital. Also, business owners who cannot
avail a business loan can opt for this alternative.
A. As per the agreement, businesses may be required to pledge equipment, machinery or
other assets as collateral to avail a significant amount.
A. Usually, the funds availed through vendor financing are more than what typical
banking institutions extend to business entities. It often comes with simpler terms of
A. When compared to financial institutions, the eligibility criteria accompanying vendor
finance are simpler to meet. Typically, creditworthy companies carrying goodwill and
cordial relation with vendors can avail this finance easily.
A. Here are a few things to know about vendor financing – borrowers need to deposit some
money upfront for availing credit, wherein, also the outstanding amount attracts
interest, and they may need to provide security against the due amount.
A. It is a form of vendor finance that takes the form of a deferred loan. Such a loan is
extended by a vendor and is secured by goods that customers purchase from him/her.
A. Vendor financing is considered to be suitable for small businesses that wish to
expand their capital and production without seeking any traditional funding options. It
also helps improve the quality of produced goods.
A. Asset finance, private equity investment, business loan and asset finance are among
the many alternatives to vendor financing. Businesses may opt for invoice financing to
replenish their working capital.