Increase Sales by Offering Vendor Finance to Your Customers

Vendor finance is a powerful tool to have in your sales arsenal. Not only can it help you overcome key barriers and close more sales, but it also helps build stronger business relationships with your clients. Vendor finance comes into its own if you sell high-value services or products where cost and cash flow are a key concern for your customers; it helps your sales team overcome this objection without your customers needing to secure a bank loan or deposit the business’ assets as collateral.

But what exactly is vendor finance? In this article, we’ll explain what vendor finance is, how you can use it to secure more sales, and how it can enable you to help your clients grow their businesses faster.

What Is Vendor Finance?

Vendor finance is also known as partner finance, “dealer finance”, “supplier finance”, and “supply chain finance”. It is an arrangement in which a financing company partners with an equipment provider or professional service provider, offering financing options to the company’s clients in order to aid the purchase of their specific products or services.

The agreement terms will typically depend on the vendor, as well as the sale being made. In most cases, clients should expect a vendor loan interest rate between 5% to 10%, which is added onto regular payments during the loan period.

Vendor finance can benefit the customer by making the purchase of equipment or business loans affordable and accessible. The financing options offered through the equipment provider may be more tailored to the customer's needs and may offer more flexible terms than traditional financing options.

What Is a Vendor?

A vendor is a person or company that sells goods or services to another client or company, ranging from small businesses to large corporations or even individuals. It is usually required for business-to-business transactions or supply chains. At Union Business Finance, we specialise in providing partner finance within the business-to-business (B2B) sector.

Advantages of Vendor Finance

The benefits of vendor finance are reaped by both the vendor and the customer.

Advantages for the vendor include:

• Expands customer base by making products more affordable.
• No costs for the vendor.
• Easy to set up.
• All repayments are sent directly to the lender, so there is no ongoing account management of the loan.
• Security of long-term relationships with the customer, as they’re able to provide flexible financial agreements.
• Improvement of their credit profile through the management of cash flow.

Advantages for the customer include:

• Improved business growth due to being able to secure a much-needed product or service.
• Typically involves less paperwork and quicker approvals than traditional loans.
• Flexible financial alternatives, as opposed to a traditional bank loan.
• Improved relationships with the vendor and future vendors.
• Particularly viable option for those who might not qualify for traditional bank or business loans.
• Ideal for acquiring goods and services without depleting working capital.

Disadvantages of Vendor Financing

Mostly, the disadvantages of vendor financing fall towards the end user (customer). The reasons why disadvantages could occur are:

• May have higher interest rates than traditional loans.
• Finance cannot be spent anywhere other than with the vendor.
• May not be offered to new customers, since vendors may prioritise existing relationships.

How Does Vendor Finance Work?

Vendor finance is really simple and works as follows:

3rd Party Vendor Finance

In this model, the vendor partners with a lender to provide financing to the customer.

1. The vendor’s client is interested in purchasing the goods or services of the vendor but has cost or cash flow concerns which have the potential to block the sale.
2. The vendor (via Union Business Finance) offers supplier financing to the customer.
3. The customer confirms and agrees to the vendor finance arrangements, signing a loan to the vendor.
4. The lender pays the vendor the agreed amount for the goods or services on behalf of the client.
5. The vendor then provides the product or service to the customer.
6. The customer begins to make payments according to the loan agreement schedule until it has been paid in full.
7. Interest from the agreement can be earned on the loan, totalling up both the price of the service and extra finance earned using the contract.

1st Party Vendor Finance

Here, the vendor finances the sale without a third-party lender.

1. The vendor’s client is interested in purchasing the goods or services of the vendor but has cost or cash flow concerns which have the potential to block the sale.
2. The customer applies for financing directly through the vendor.
3. Instead of requiring full upfront payment, the vendor provides a financing plan.
4. Both parties agree on repayment terms, including interest (if applicable) and the payment schedule.
5. The customer receives the product/service while committing to the repayment plan.
6. The customer makes regular payments directly to the vendor over the agreed period.

Examples of Vendor Finance

• If a farmer needed to purchase a new tractor, they would find the perfect one required for the business.
• After looking at the price at a local dealership (e.g. £500,000), the farmer would then have to decide the financial options for paying for the product. It is at this point where cost or cash flow concerns are usually raised as an objection that the sales team needs to overcome.
• The vendor would offer a solution through a vendor financial agreement.
• A lender assesses the creditworthiness of the client, and if deemed acceptable, the lender agrees to pay for the tractor on the end user's behalf.
• The agreement of payment is accepted.
• The tractor is provided to the farmer by the vendor. At this point, the lender becomes the owner of the tractor until the finance is settled in full.
• The agreed financial payments are made, with additional interest.
• The finance of the equipment has been paid off, and now the product of the tractor belongs to the farmer.

Different Types of Vendor Financing

Debt Vendor Finance

Debt Vendor Financing occurs when the client or business agrees to borrow the finance payment to purchase the goods or services they may need, with interest included. This can be paid off over a certain period of time.

If this payment is not successful, it results in the dismissal of any future financial arrangements and a bad debt write-off.

Equity Vendor Finance

Equity Vendor Financing is the process of the client offering an amount of its own company’s shares in exchange for the goods or services it requires from the vendor; rather than using financial payments. Ultimately, the vendor then becomes a shareholder of the client’s business, additionally having a small amount of control in further business decisions. This method of financing is common for small and start-up businesses.

What Is a Vendor Note?

A vendor note is a type of supplier finance. It is a financial agreement for the customer to pay the vendor for the product or goods received over a short period of time. This is particularly good for smaller businesses, who require goods or a product swiftly but do not have the current funds to pay straight away.

Alternatives to Vendor Finance for Businesses

There are many alternatives to vendor finance, all of which share unique benefits. If you’re unsure which is the most suitable for your needs, don’t hesitate to ask our finance brokers!

• Business Loans offer a fixed amount of capital that businesses repay over a set period with interest. They are ideal for covering large expenses or funding growth.
• Asset-Based Lending allows businesses to secure financing by using assets like inventory, equipment, or accounts receivable as collateral, offering flexible access to capital.
• Inventory Finance helps businesses purchase and maintain stock by using existing or future inventory as collateral, improving cash flow without depleting working capital.
• Merchant Cash Advances provide quick access to funds in exchange for a percentage of future sales, offering fast but often more expensive financing.

What Does It Cost to Offer Vendor Finance?

Nothing! Ultimately it is an introduction between the customer and the vendor. At Union Business Finance, we can help you find the best funding if you are looking for partner finance to boost your business growth and sales revenue. If you need more information, simply give us a call today at 01442 617799, or fill out our enquiry form below!

Increase your sales conversions today with our Partner Finance Solutions.