This type of asset finance occurs when the supplier of the asset also offers finance on terms to the borrower. Vendor finance is an alternative to the usual cash sale, and certain types of assets seem to attract heavy business in this regard, however it is usually presented as an alternative at the point of sale.
Being well suited to almost any type of asset, vendor finance is tailored to the life of the asset, but as this stringent application can sometimes be unsuitable to the borrower, for an additional cost the borrower is able to alter the repayments to ones that coincide with their projected cash flow. It also has the advantage of allowing the borrower to select an asset of high quality, as the repayments are spread over time and the added utility of a superior asset is more able to be realized over this period.
For the borrower, it is relatively easy to analyze how much net cost the business will incur in acquiring the asset, but when tailoring the repayments of vendor finance across the life of the asset, it is difficult to estimate the cost to the business if the asset needs to be replaced. The business and its industry may undergo change along with technological advancement, and this may dramatically affect productivity and the ability to compete in the market effectively. Therefore when considering vendor finance, attention should be paid to the cost and flexibility of an early settlement and even the cost of refinancing the asset.
Indeed, sometimes vendor finance can cross the borders of this niche area of asset financing in offering the provision of finance under a contract, but with the financial obligations being owed to a party unknown to the buyer. In the United Kingdom this is commonly known as a ‘brass plate’.
If this type of asset finance is intended the borrower must ensure that all the provisions of the contract are understood and accepted. Ordinarily, this invades the basic premise that only a party to a contract is able to enforce it, but with the device of a trust, many suppliers of assets are able to provide this unique type of vendor finance.
Apart from the obvious advantage of being able to spread the cost of the asset over time, the borrower is able to allow the asset itself to provide the cash repayments from generated revenue. Indicators to verify the health of a business may also reflect well in its balance sheet as cash flow is used to expand supply rather than large amounts of capital expense at any one point in time. That is the basics of how the process works anyway.
In addition to this, many a successful business has been built on foundational relationships with business partners, and particularly if the asset sought is one that will require replacement, repair or servicing, this kind of asset finance while more costly than some alternatives, may prove to be worthwhile in a long term business relationship.