# What is Vendor Financing? Definition, Types, and Advantages

## What Is Vendor Financing?

Vendor financing is a financial term that describes the lending of money by a [vendor](https://www.investopedia.com/terms/v/vendor.asp) to a customer who uses that capital to purchase that specific vendor's product or service offerings.

Sometimes called "[trade credit](https://www.investopedia.com/terms/t/trade-credit.asp)," vendor financing usually takes the form of deferred loans from the vendor. It may also include a transfer of stock shares from the borrowing company to the vendor. Vendor financing often has higher interest rates than traditional bank loans. They also help cement the relationships between vendors and business owners.

### Key Takeaways

*   Vendor financing allows businesses to acquire essential goods or services by borrowing directly from the vendor, bypassing the need for traditional bank loans or collateral.  
    
*   This type of financing can include both debt and equity arrangements, with debt usually involving deferred payments and equity often trading company stock for goods, particularly in startups.  
    
*   Vendor financing typically comes with higher interest rates compared to standard bank loans but can solidify the vendor-customer relationship by providing a competitive edge.  
    
*   By engaging in vendor financing, vendors can maintain sales momentum and secure long-term business relationships, even if it means delayed payments from customers.  
    
*   Vendor financing is common among various service providers, such as payroll management firms and office equipment suppliers, as it enhances market competitiveness and closely ties vendors to business success.

## How Vendor Financing Strengthens Business Relationships

Vendor financing lets business owners buy goods or services without needing traditional bank loans or collateral. Vendor financing has several other advantages. Not only does it help loan recipients cultivate strong credit histories, but it also allows them to table the use of bank financing until it becomes abundantly necessary to make revenue-boosting capital improvements.

Vendor financing most commonly occurs when a vendor sees a higher value in a customer's business than a traditional lending institution does. Consequently, a healthy, trusting relationship between the borrower and the vendor sits at the heart of the vendor financing dynamic.

For vendors, selling with delayed payment is better than no sale, even without immediate payment. On the upside, the vendor collects interest on the deferred payments. Offering vendor financing gives vendors a competitive edge over rivals. This arm or unit of the vendor's business is known as an [investment center](https://www.investopedia.com/terms/i/investment-center.asp) and is regularly reviewed to ensure it is profitable.

## Different Structures of Vendor Financing

Vendor financing can be structured with either debt or equity instruments. In debt vendor financing, the borrower agrees to pay a particular price for inventory with an agreed-upon interest charge. The sum is either repaid over time or written off as a [bad debt](https://www.investopedia.com/terms/b/baddebt.asp). With equity vendor financing, the vendor can provide goods in exchange for an agreed-upon amount of company stock.

Equity vendor financing is more common with startup businesses, which often use a form of vendor-supplied financing known as "[inventory financing](https://www.investopedia.com/terms/i/inventory-financing.asp)," which essentially uses inventory as collateral to back lines of credit or short-term loans.

> **Fast Fact**
>
> In business, using credit in vendor finance is known as an "open account."

Vendor financing can also be used when individuals lack the capital needed to buy a business outright. A vendor may rely on the sales it makes to a particular business, to make its own financial targets. And by providing financing in the form of a loan, it can secure the business, while strengthening the relationship with the business owner, to make sure it thrives over the long haul.

## Exploring Vendor Types in Vendor Financing

Vendors can take many forms, including payroll management outfits, security firms, maintenance organizations, and other service providers. [Business-to-business](https://www.investopedia.com/terms/b/btob.asp) suppliers, such as office equipment manufacturers are common providers of vendor financing. Materials and parts suppliers likewise frequently engage in vendor financing activities.