Online Reporter
Godknows Hofisi
Business Law
I have consulted various online sources and combined them with my practical knowledge in finance and legal practice. Vendor finance is a form of financing for a business, as explained below.
Definition of vendor finance
According to online sources, vendor finance is a form of lending in which a vendor, rather than a bank or financial institution, lends money to its customer to buy the vendor’s goods or services.
Put differently, vendor finance involves a vendor lending money to its customer and the customer uses the funds lent by the vendor to buy goods or services from the vendor for use or resale. In simple terms, a vendor is an individual or entity that sells goods or services to someone else.
A vendor may agree to finance its customer to develop a relationship with the customer in certain markets or if the vendor sees a lot of commercial value or potential in a customer, but the customer has no funding to purchase goods or services from the vendor upfront.
A vendor may want to enter a market and dominate it ahead of its competitors.
Types of vendor finance
There are different forms of vendor finance as explained below.
Supplier credit
This is the most common form of finance where the vendor sells goods or services on credit and allows the customer to pay according to agreed terms after delivery, use or selling of goods, for example.
This is common with manufacturers and wholesalers in many stable economies. Some international suppliers may extend credit supply to customers in other jurisdictions, depending on the vendor’s risk assessment.
Loan finance by a vendor
A vendor may even extend a loan to its customer, particularly its customer who is unable to secure loan finance from a bank or financial institution or if such vendor finance can be at more favourable terms and conditions, or the vendor may use that as an incentive for the customer to purchase from the vendor.
An example can be an overseas vendor or company that sees a good market for its products in Zimbabwe, but the Zimbabwean company has no financial capacity to buy from the vendor and sell the required volumes in Zimbabwe. The vendor may structure finance in two ways. Part may be by way of supplier credit and the other in the form of a loan. For example, if the Zimbabwean, after being granted supply credit, still needs working capital, such as to pay duty or finance selling costs, the vendor may extend a loan to cover that.
Equity finance by a vendor
Instead of loan finance, a vendor may buy equity in its customer and payment for the shares will go towards financing the customer. The equity may be in the form of preference shares or ordinary shares.
That way, the customer’s liquidity situation will improve. The vendor may hold the shares long-term or short-term, depending on its appetite and the customer’s wishes.
This may even involve the formation of a special-purpose vehicle jointly owned by the vendor and the customer. Such transactions may be subject to scrutiny by regulatory bodies on competition and fair trade.
Vendor finance agreement
In this article, I summarise the key elements of a vendor financing agreement for the benefit of readers.
- Parties to the agreement, ie lender (vendor) and borrower (customer).
- Definition of key terms.
- Interpretation
- Preamble to give context to the agreement.
- Commencement and tenure.
- Nature of the relation or agreement, what type of financing structure.
- Principal credit amount, loan amount, or equity investment.
- Interest or dividend required.
- Purpose of the finance and restricted use.
- Drawdown mechanism.
- Renewals
- Repayment terms. Buy-back or disposal options in the case of shares.
- Security required by the vendor.
- Breach.
- Termination.
- Governing laws.
- Dispute resolution mechanisms.
Conclusion
Vendor finance is an effective way of financing a business in which a vendor or supplier extends finance to its customers, where the vendor sees value in a client that is unable to pay for goods or services upfront.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations), MBA (EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, a chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce, where he worked as Finance & Administration (Human Resources) Director and Chief Operating Officer for many years and is a former/World Bank staffer in the Resource Management Unit. He has wide-ranging board experience up to Chairperson, spanning over 20 years. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@ hofisilaw.com or gohofisi@ gmail.com. Visit: www//:hofisilaw.com for more articles.
