Even if your business is short on cash, there are a few ways of continuing your everyday operations. One of them is taking advantage of vendor finance. This allows your business to purchase inventory or equipment from suppliers even if they don’t have the necessary money, so you can keep operating despite low funds.

This article will explain what vendor finance for business is and look at its advantages and disadvantages. We’ll cover a range of topics, such as:

  • What is vendor finance for a business?
  • What are the benefits of vendor finance?
  • What are the drawbacks of vendor finance?
  • How can Countingup help me use vendor finance responsibly?

What is vendor finance for a business?

A vendor is anyone who sells goods or services — if your business sells goods or services, you’re technically a vendor. For this article, we’ll only refer to companies offering vendor finance as vendors to save on confusion.

Vendor financing is a loan that a vendor gives to a customer to buy goods and services from that same vendor. It’s usually something that a vendor only offers if it sells its products to other businesses, but that’s not a requirement. Vendor financing is available to businesses, but it’s also available to individuals and even governments.

A vendor will usually only offer vendor finance if they have an ongoing relationship with a company. In these instances, the vendor appreciates the relationship and doesn’t want to refuse to sell its products to a company because the company currently lacks funds. Instead, they will loan the money necessary to buy the goods and services the company needs.

There are two types of vendor financing available: debt financing and equity financing. Both have different terms regarding repayment as well as different advantages and disadvantages.

Debt financing

Debt financing is essentially the same as a bank loan. A company approaches a vendor but doesn’t have enough cash to complete a purchase. The vendor loans the company enough money to buy what they want, and the company must repay that amount. 

Debt financing usually involves an interest charge too. After a set period (this could be a month, week, or quarter), the debt will accrue interest and continue accruing interest as time passes. 

If a company borrows money through debt financing and cannot repay the debt, the vendor must write off the loan as bad debt. Bad debt is a tax-deductible business expense, which means the vendor can claim it back to reduce their tax bill. That said, they may still lose money on the agreement. 

For the borrower, not paying back a debt financing loan means they’ll ruin the relationship they have with that vendor.

Equity financing

The other kind of vendor finance is equity financing. This means the vendor asks to be paid back in shares of the borrowing company instead of in cash. Owning shares makes the vendor a shareholder in the company as they own part of its equity. This means they receive dividends from the borrowing company and have a say in any major company decisions. 

This type of vendor finance is only possible for limited companies, as they will have shares to sell while sole traders do not. It’s more commonly offered to small startup businesses, as they might not have a credit history built up, which means it would be risky to provide them with debt financing.  

What are the benefits of using vendor finance?

The main benefit of vendor financing is that it allows you to buy supplies without having much cash. If your business is low on funds, but a good month of sales would get you back on track, you might want to use vendor financing to buy more inventory. In this way, vendor financing can save a struggling business.

Another benefit of vendor financing is that the vendors that offer it do not need to meet the eligibility requirements of traditional lenders like banks. This means that even if you have a bad credit history or (in the case of startups) no credit history at all, you can use vendor financing to purchase goods and services for your business.

Finally, vendor financing is helpful because it allows businesses to be flexible when spending their money. For example, say you have limited funds and desperately need to invest money into your marketing, but you also need to buy more inventory. You might consider using vendor financing in this example. 

Financing would allow you to invest in your marketing, while also getting the inventory you need. The only issue is paying back the finance, but you should be able to do this if your next month of sales goes well.

What are the drawbacks of using vendor finance? 

One of the disadvantages of vendor finance is that you can’t spend it anywhere. Usually, a vendor will only allow you to spend the loan on their products and services. This can be limiting if you need a wide variety of goods.

Another disadvantage is that vendors don’t usually specialise in finance, so they might not be able to loan very much to you. They may also charge high interest rates, so you may find traditional loans more affordable.

How can Countingup help me use vendor finance responsibly?

Vendor finance can be a risk, as not being able to repay the loan can ruin the relationship you have with your suppliers. If you use accounting software like the Countingup app, though, you can keep track of your transactions. This will help you keep on top of your finances and ensure that you can repay any loans. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.