Defined as receiving the financing for an asset from the provider of the asset, vendor finance is a common way to receive an asset before having the money to pay for it. Vendor finance programs can come on a piece of equipment, real estate, software, and even intangible assets.
Vendor Finance: Meaning
Vendor finance means receiving financing from a vendor rather than a bank or investor. This often creates a mutual benefit; the buyer wants the item now in order to pay for it through increased productivity, while the seller of an item appreciates increased income from selling and financing an item rather than receiving just the sales price.
Vendor financed companies can agree to either debt or equity financing. To phrase this another way, a company can receive vendor financing in 2 ways. First, the business can receive the item at a sales price with an agreed amount of interest, on the sales price, which accrues as time progresses. Alternatively, a firm can receive the item in exchange for a certain amount of company stock. Here, no monetary repayment of the asset is needed because the vendor has already been paid in stock. Generally, vendor finance in the form of equity is more common for startup businesses. A vendor finance association may be available in some areas to gain advice and planning on the subject.
Vendor Finance: Example
Jonathan works at a business brokering firm. His employer, a company which arranges the sale of a business between the exiting entrepreneur and a buyer, is a successful company with a professional reputation. Jonathan enjoys his work because he assists people in their exit plan, assists people in starting a business, and gets experience in a variety of entrepreneurial firms while he does it.
Recently, Jonathan is brokering the sale of a small, yet successful, chain of ice cream shops. The exiting business woman, the founder of the firm, has worked to the bone to grow the company. She has earned her retirement with her application of sweat equity.
Jonathan eventually comes across a soon-to-be entrepreneur. His experience in the restaurant industry makes him a likely candidate. The buyer is interested in applying the expertise he learned, mainly focused on growing restaurants, to a company where he will be the main controller of company success. Jonathan arranges a meeting between the two business people.
At the meeting Jonathan makes a discovery: the potential buyer has slightly less to invest in the business than the seller’s price. This appears to both to be a major issue which stands in the way of the sale of the company. Jonathan, at this point, steps in with another option: use a vendor finance plan on the remaining amount to be paid to the seller. Once Jonathan poses this option the two parties restart negotiations.
The two decide on vendor equity financing for the remaining amount of money to be paid to the seller. To her this seems like an excellent idea: she can reduce risk while still taking benefit from growth of the company that she started. The buyer also appreciates this option: he can go into business by buying a reputable company which already has customers. The two resolve to complete the purchase. They also agree on a one year transition where the buyer will be able to receive consultation from the experienced manager.
Jonathan is pleased by his achievement. He takes great joy from helping one person harvest the benefits of their work while allowing another to begin the process without the struggles of the startup phase. He receives his commission from the sale and is pleased by this achievement also.
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