All businesses have to operate in a certain way so that they can grow. Companies need liquid assets so that they can do well. But sometimes, a business can start running on negative capital or lack finances to carry out daily business activities. The firm has several financing options to consider. The company can opt to go for debt financing by borrowing a loan with a specified interest rate and the repayment period. A business can also consider working capital as its source of short term financing so that it can finance daily cash needs. One of the significant advantages of working capital financing is that the control of your company will remain with you because it is considered to be debt financing. If your company has a good credit rating, the lender can give you unsecured working capital. In most cases, working capital is secured by your assets as the company owner or by the available business assets. The other aspect you need to know about this kind of loan is that it is known for having a higher interest rate than typical business loans. You also have to remember that the lending institution will be making an automatic deduction from your business checking account, every week or every day until the loan is fully repaid. The other common form of financing for a business is vendor financing. The following are vital characteristics of vendor financing.
Vendor financing is also referred to as trade credit. This is a type of funding where a vendor lends company cash, which the company uses to purchase goods or services from the same vendor. It can be seen as deferred loans obtained from a particular vendor. The business borrowing can also transfer company shares to the vendor so that it can be given certain products or provided with a specific service. You should also be aware of the fact that vendor financing is offered on particular occasions where the borrowing company has a high value, and the vendor wants to establish a business relationship with it. You also need to know that vendor financing has a higher interest rate than what other lending institutions like banks offer.
Vendor financing is usually unsecured because the borrowing company does not require to give collateral. The main benefit is this particular type of financing is the fact that the vendor and the company will have an established business relationship. It is also beneficial to the vendor since it helps their business attain a competitive advantage, mainly if it deals with big-ticket items. It is crucial to the borrowing company because the company can quickly obtain vital services and products without borrowing loans from banks. It is also helpful because it ensures that the borrowing company establishes a good credit history.
There are different types of vendor financing. There is debt vendor financing where the borrowing company has to pay the inventory amount as well as interest that is agreed upon. Equity vendor financing involves the exchange of inventory with company shares. Vendors can be business to business suppliers, service providing companies, equipment manufacturers, among other types of companies.