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How Can Vendor Financing Grow Your Small Business?

Ayushi Choudhary

Whether small or big, businesses require constant funds to manage operational liabilities, upgradation, and business expansion. Sometimes, these funds are required on an emergency basis, and arranging a substantial amount can be difficult. This is when borrowers seek external help from traditional lenders or opt for vendor finance, also termed as “seller financing” or “trade-credit.”

Ways to grow small businesses with the help of vendor financing 

A borrower can opt for vendor finance when facing a cash shortage to expand or upgrade their business. They can depend on the sales from a particular business to create its own financial targets. Thus, by providing substantial funding, they can secure their business and strengthen the relationship with business owners. 

Following are the benefits of vendor finance that borrowers can avail-

  • Avoids financial institutions 

If a borrower does not possess a good credit profile, it can be difficult to approve a business loan. Therefore, it will not be possible for the borrowers to purchase inventory, equipment and meet other essential business requirements. On the other hand, if borrowers opt for vendor financing, it will allow them to directly place their request to the company, increasing the chances of availing funds.

  • Beneficial for start-ups

Start-ups face a major financial crunch while starting their business. Without a reliable and established business background, lenders hesitate to sanction high-loan amount to such organisations. Thus, with this funding option, borrowers can gather funds from the lender in the form of a loan and purchase necessary equipment and machinery to grow their business.

  • Annuity stream

The annuity stream states that the vendor will keep receiving payments from the business profits even after the company stops operating. If a borrower chooses to default on the loan repayment, the vendor has the right to seize the business and sell off some assets associated with the company to gain the unpaid amount.

  • Avail of best deals and products
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Borrowers will be able to purchase upgraded products and equipment required for their business, which would otherwise be impossible without vendor finance. This funding option eliminates the possibility of leasing bad equipment. Moreover, this financing option allows borrowers to make repayments in bits throughout the loan tenor.

Borrowers must note that they can avail the benefits after meeting some basic eligibility criteria. Therefore, by choosing vendor financing, borrowers can create a growth plan for their small businesses or start-ups.

What is vendor financing, and how it works?

Vendor financing is a beneficial funding arrangement where a vendor lends a substantial credit to the borrower who utilises the borrowed money to purchase the specific vendor’s services and products. In most cases, vendor finance is considered a deferred credit. Under this financing facility, borrowers do not have to pay for their purchases immediately or after selling the products. Vendor financing involves two different methods- 

  • Debt finance
  • Inventory  or equity financing

In debt financing, borrowers can avail products at the selling price but are liable to pay interest rates at predetermined rates. Thus, vendors can earn interest amounts with each instalment payment.

In this type of vendor finance arrangement, borrowers can avail products in exchange for several shares. As a result, most small businesses are likely to adopt inventory finance. Thus, businesses seek vendor financing as the last option when they fail to meet the specific criteria for business loan application approval.

However, leading NBFCs like Bajaj Finserv provide business loans at affordable interest rates and minimal processing charges. Moreover, with the benefit of pre-approved offers, the loaning procedure becomes simplified and accelerated. These offers are available on a wide range of unsecured and secured financial products. One can check their pre-approved offers online by submitting their contact information.

Thus, borrowers can consider opting for vendor finance programs to grow their small business substantially.

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