Vendor finance and vendor loans explained

Vendor finance and vendor loans explained


min read

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Vendor finance can be a viable option for businesses that want to grow without relying on mainstream lenders, using existing relationships with suppliers to open up alternative borrowing options. So, what does this type of finance involve, and is it the best option for your business?

What is a vendor?

A vendor is anyone who sells goods or services to someone else. That someone else might be a business, an individual or a government.

Vendors can provide both goods and services, and take a variety of forms. The most common types of vendors to offer vendor finance tend to be business to business (B2B) suppliers, who may offer finance to other companies as a way to incentivise sales or maintain an ongoing business relationship.

These companies often sell products such as specialist equipment, materials or parts that other companies rely on, although vendor finance isn’t limited to such suppliers – any business offering goods or services can potentially offer vendor finance.

What is vendor finance?

Vendor finance involves a vendor lending money to their customer, who will use the funds to buy goods or services from the vendor. It’s most commonly used when a supplier sees value in the relationship with a customer, who may not always have the cash flow available to continue buying products or services without some form of finance in place.

For this reason, an established relationship between the borrower and vendor is almost always in place prior to a vendor finance agreement being made. If a vendor values the continued business from their customer and trusts that they will be able to pay back the money, offering finance can be a good way to incentivise a continuing relationship with that customer.

Vendors may also offer this type of finance to earn interest paid by the customer, although vendor financing without interest is also possible.


How does a vendor loan work?

In a vendor loan, the customer will usually pay a deposit to the vendor in exchange for the amount borrowed, which will be paid back over time along with any interest agreed.

Agreements may vary depending on the individual vendor and the sale being made, but typical interest rates for vendor loans range from 5% to 10%. The interest rate will be added onto regular repayments until the borrowed amount has been returned.

Obtaining credit in this way means that the borrower doesn’t need to rely on financial institutions such as banks, and therefore do not need to meet any applicable lending requirements. The trade-off for this can be higher interest rates than banks or other lenders might charge, although some vendors intentionally keep their interest rates low to incentivise new business and secure a competitive advantage over similar suppliers.

Vendor finance 1

Example of vendor finance

To understand vendor finance, consider the following example:

A food delivery company wants to buy a number of vans from a vehicle supplier. The vans needed will cost £500,000, but the food delivery company doesn’t have the working capital available to spend this kind of money all at once.

Since the vehicle supplier has provided the food delivery company with vehicles in the past and values their continuing relationship, they agree to loan the money their customer needs through a vendor finance agreement. To protect itself, the vehicle supplier stipulates that the vans must be used as collateral – if the food delivery company fails to pay back the amount borrowed, the vans must be returned.

The food delivery company agrees to these terms and pays a 10% deposit (£50,000) to gain use of the vans, opening up new business opportunities that will allow it to make more money. It pays back the vehicle supplier via monthly instalments, along with interest of 5%, over the course of 12 months.

What is the advantage of a vendor loan?

There are a few advantages to choosing a vendor loan over other types of finance. As mentioned above, vendor finance does not require the lender to meet the specific criteria set by mainstream lenders – this means that while a customer might be rejected for a loan from the bank, they could still potentially secure the amount they need via vendor financing.

While most vendor loan agreements charge interest, some don’t, and this can be another distinct advantage to choosing vendor finance over other types of borrowing.

Another advantage of vendor financing is the flexibility it offers borrowers when securing funds for purchases. Rather than paying for goods or services with cash that may be needed in other areas, a business can keep its cash flow flexible by opting to borrow the money from a vendor, paying back the loan with any additional business earnings that the new purchase makes possible.

What are the disadvantages of a vendor loan?

Vendor finance isn’t always the best option when it comes to borrowing money. Some vendor finance agreements will demand high interest rates, so it may be cheaper to find a loan elsewhere. And since vendors usually don’t have their own in-house financing departments, you might not be able to borrow as much through a vendor loan as you could somewhere else.

Vendor finance usually means that the borrower will only be able to use the funds with the lender, rather than spending it with several suppliers.

Alternatives to vendor finance

If vendor finance doesn’t sound right for you, then you could consider using iwoca to facilitate growth in your business. iwoca's Flexi-loan offers loans of between £1,000 and £200,000. You can check your eligibility in 2 minutes by clicking the button below.


What is a vendor note?

A vendor note is a common type of vendor finance in which the vendor provides a short-term loan to a customer, usually securing the money borrowed with the goods bought by the customer.

Alternatively, the vendor may choose to secure the loan with a pledge for something else from the customer, such as existing business assets.

This use of collateral can help to ensure that the positive relationship between the vendor and their customer is maintained, demonstrating trust on both sides and ensuring that the vendor is protected if the loan defaults.

Vendor financing

What are the different types of vendor finance?

There are two main types of vendor finance: debt financing and equity financing. While both broadly fall under the category of vendor financing, they can have very different implications on the future finances of the company borrowing money.

With debt vendor financing the borrower receives the products or services it needs in exchange for regular repayments to the vendor at an agreed interest rate. Interest will continue to accrue for as long as the debt remains unpaid. If, after a long period of failed repayment, the vendor decides to write off the loan as a bad debt, the borrower will not be able to enter into future financing agreements with the lender.

Equity vendor financing involves the borrower receiving the products or services it needs in exchange for a percentage of business shares given to the vendor. In this type of financing, the borrower will not need to make repayments in cash, but will instead give up a portion of equity in their business to the vendor, making them a shareholder. This means that the vendor will continue to receive dividends for as long as they own their shares, and may have a say over how the borrower’s company is run.

Start-up companies often rely on this type of vendor financing as a way to fund early stage growth and gain the expertise of established business owners who may be able to help steer their new venture towards commercial success.

What costs are involved in vendor financing?

The costs involved in vendor financing will vary depending on the agreement made. Most involve paying a deposit to the vendor, followed by interest that will be added to regular repayments of the total borrowed amount. Vendors lending large amounts of money will usually want some form of financial reward for the risk they are taking, so interest rates for vendor finance are often higher than loans from traditional finance institutions.

It may be possible to negotiate with vendors to reduce the amount of interest you pay, or to avoid paying interest entirely if the company values your continued business and wants to avoid losing you to a competitor. As always, this depends on your individual circumstances and how much money you are seeking to borrow.

Would vendor financing suit me?

Vendor finance might suit you if you need to purchase essential goods for your business and don’t want to use money that’s already in your business. If you’d rather not borrow money from the bank (or can’t because you fail to meet their lending requirements), vendor finance could also be a viable option.

That said, vendor finance is usually only possible to businesses who have an existing relationship with suppliers who are open to this type of agreement.

More business funding alternatives


Words by
Matt Ayres
Article updated on:
May 25, 2022

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