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Guest post by: Joseph Lizio Become an Author

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When most business owners think about vendor financing they think about trade finance meaning that a supplier or vendor allows the business to purchase its products via an informal credit line. For example, your business purchases $10,000 in goods from a major supplier and based on your business's long-term relationship with that provider, the supplier or vendor may allow you 20 days to pay for those goods.

This delay allows your business time to convert those goods (purchased from that supplier or vendor) into finished products that can then be sold to customers. Thus, if your business's customers pay you for the finished product before the 20 day period is up, you can use those funds to pay off the supplier - essentially buying needed materials at zero or little cost to your company.

Businesses and their suppliers have been conducting this type of informal financing for decades. The purchasing business or the one that gets the trade terms benefits because it is allowed a grace period to pay for those material and, on the other hand, the supplier benefits as it keeps its customers (your business) happy and coming back for more.

Recently, however, there has cropped up a new form of financing.

This new form is where a vendor or supplier provides money directly to one of its customers in the form of a business loan and requires the customers to use those funds to purchase the supplier's or vendor's products.

Example, Microsoft has recently been providing some of its less than financially strong customers (customers who are either hampered by the tight credit market or just cannot get financing elsewhere) actual money (cash) so that these customers can use those funds to purchase Microsoft's products. Thus, for businesses needing to add additional software products or upgrade to newer versions, this might just be a simple way of doing so without depleting necessary cash on hand.

Now, even if the business has to pay interest on these funds - making the products purchased that much more expensive - it still benefits them by allow them to get what they need now but only having to pay for it over times (essentially using the goods purchased to pay for the loan).

Vendors also benefit in several ways -ways that your business can use to its advantage:

First, it helps the vendor's sales volume. Instead of selling good on credit terms and simply increasing accounts receivables, the vendor actually receive hard cash for the sale (even though it is their own money); cash that immediately flows through to the bottom line - great for public companies approaching quarterly earning reports.

Second, it provides the vendor an additional stream of revenue in the form of interest income and fees. Do know that if your business is approved for a vendor loan, there will be interest and fees involved just like traditional business loans and, since most of these borrowers cannot get financing elsewhere, the interest rate and fees may be higher than other business financing options. But, if it is your only option and you still can earn a decent profit from it - them by all means. They are scratching your back and you should repay the favor.

Lastly, when vendors are facing slow demand for their products (especially in recessionary times or lower than average consumer and business confidence) vendors can use this type of arrangement to ensure that it 1) keeps its current customers base (by providing those businesses, who may really be struggling, a means to continue to purchase goods and stay in business until the slow economic period abates) and 2) can attract new customers (either start-up businesses or established players who frequent competitors) by offering them quick and simple financing along with their products and services (the ultimate bundle of products - both the goods and the financing for them).

While there are pit falls to this type of business financing; just like any type of financing, businesses may find that these vendor loans are just the ticket to keep them in the game until the market really beings to recover or feel like it has.

But, with all financing, it is always best for the borrower to consider all options and weigh the pros against the cons. Financially sound management decision will always make the best decision for the business as a whole. But, if your company is seeking a business loan and your bank will still not take your calls, you might just try your vendors - especially if you were intending to use those funds to purchase their goods anyways.

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