Vendor financing refers to financing provided by a vendor to a customer on the condition that the customer uses the products and/or services of the vendor on an exclusive basis. The interest rate on vendor loans is usually higher than the rate charged by commercial banks, but the terms are almost always more favorable to the customer/borrower.

Vendor financing usually cements the relationship between the vendor and the customer. Payments are usually deferred in order to make it easier for the customer/borrower to collect revenue before payments are due on the vendor loan. By offering vendor financing, a vendor has a competitive advantage over other vendors that supply the same or similar products and/or services.

In the event of a monetary default, a non-recourse loan allows a lender to seize only the collateral set forth in the loan agreement, even if its value is less than the amount owed. A recourse loan allows a lender to pursue income and assets other than the collateral set forth in the loan agreement if the collateral is insufficient to repay the debt.

 

Non-Recourse Loans

A non-recourse loan is a secured loan that limits the lender's recovery to the collateral that has been pledged as security. This is nearly always real estate or marketable securities such as stocks and bonds. In the event of a default, the borrower is protected from personal liability unless he or she has committed fraud or other misconduct as defined in the loan agreement. Given that lenders can only look to the collateral for repayment, their risk is higher. Consequently, the interest rates and credit requirements for non-recourse loans are always higher. The majority of commercial banks will not make non-recourse loans. Those that will usually limit these loans to existing preferred customers with excellent credit.

 

Subordinated Debt

Subordinated debt is high risk, unsecured junior debt that ranks below senior debt, but above equity in the event of a liquidation. The interest rate on subordinated debt is always higher than on secured debt because the lender's risk of default is always higher. Subordinated debt is most common in mergers and acquisitions, and in private equity transactions where senior lenders cannot or will not provide full funding. The debt may be evidenced by bonds or a standard loan agreement.

 

Factoring - Invoice Discounting

Revenue - Based Financing

Credit Enhancement