Vendor finance

Short description: In which a vendor lends money to purchase their products

Vendor finance is a form of lending in which a vendor, instead of a bank or financial institution, lends money to be used by the borrower to buy the vendor's products or property.[1] Vendor finance is usually in the form of deferred loans from, or shares subscribed by, the vendor. The vendor often takes shares in the borrowing company. This category of finance is generally used where the vendor's expectation or knowledge of the value of the business extending the credit is higher than that of the borrower's bankers, and usually at a higher interest rate than would be offered elsewhere.[2]

A study conducted in 2004 found businesses were significantly more likely to have used vendor financing (trade credit) or credit cards when denied a bank loan.[3] This effect was seen most in businesses 1–5 years old and less in businesses aged 6–10 or 11–15 years old.[3]

Vendor finance bridges the valuation gap due to the time value of money. If the buyer of a business does not have to repay the vendor for the vendor loan for a few years, then the value of that portion of the purchase price is worthless. In some cases there is an interest charge on the vendor loan, but in other cases it is simply a deferred payment. Vendor finance is different from an Earnout because it is not contingent on performance. Since there is no contingency, vendor finance is risker for the buyer than an earn-out.

Vendor finance can also be used when the buyer does not have the funds to purchase the entire business. In this case the vendor creates a loan with an interest charge to help the buyer complete the purchase and help the seller complete the sale, usually on better terms for the seller.

## See also

* Circular investment
* Hire purchase
* Tied aid

## References

1. ↑ Duhaylongsod, Jose Benedicto B. (March 2013). "Vendor financing and its impact on vendor's optimal policies". https://rucore.libraries.rutgers.edu/rutgers-lib/40555/PDF/1/play/.
2. ↑ Sherrick, Bruce J.; Lubben, Robert W. (October 1993). "Economic Motivations for Vendor Financing: Theory and Evidence". https://ageconsearch.umn.edu/record/131334/files/sherrick1993.pdf.
3. ↑ 3.0 3.1 Danielson, Morris G; Scott, Jonathan A. (November 2004). "Bank Loan Availability and Trade Credit Demand". The Financial Review 39 (4): 579–600. doi:10.1111/j.0732-8516.2004.00089.x. https://www.researchgate.net/publication/4760059.

* v
* t
* e

Debt

Instruments|

| Bonds|

* Corporate
* Debenture
* Government
* Municipal

|

Loans|

* Business loan
* Consumer lending
* Loan shark
* Payday loan
* Predatory lending
* Usury
* Vendor finance

Management|

* Bankruptcy
* Consolidation
* Management plan
* Relief
* Restructuring
* Debt-snowball method
* Debtor-in-possession (DIP) financing
* Loan guarantee

Collection · Evasion|

* Bad debt
* Charge-off
* Collection agency
* Compliance
* Debt bondage
* Debtors' prison
* Distraint
* Garnishment
* Phantom debt
* Strategic default
* Tax refund interception

Markets|

* Consumer
* Corporate
* Government
* Medical
* Municipal
* Venture
* Buyer
* Deposit account
* Fixed income
* Money market
* Securitization

Economics|

* Consumer leverage ratio
* Debt levels and flows
* External / Internal / Odious debt

* Default
* Insolvency
* Interest
* Interest rate

0.00

(0 votes)

Original source: https://en.wikipedia.org/wiki/Vendor finance. Read more

|

Retrieved from "https://handwiki.org/wiki/index.php?title=Finance:Vendor_finance&oldid=4191933"
*[v]: View this template
*[t]: Discuss this template
*[e]: Edit this template