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Oct 24 2022
Oct 24 2022

Vendor Finance vs Traditional Finance: Which Option is Best for Equipment Purchases?

When your business needs to acquire new assets, whether it’s a new fleet of laptops or larger investments such as machinery, there are a few ways in which you can finance the purchase. The purchase can be funded with capital expenditure, paying the entire amount upon ordering the goods, but this restricts cash flow and working capital. The other option is to finance the purchase, but it’s important to remember that not all finance options are created equal.

Financing through your bank may give you the capital you need, but the arrangement may not be optimised to fit your specific asset use and cash flow needs. Vendor finance is a superior alternative to traditional financing channels, allowing businesses to access the assets they need while spreading the cost of equipment over time. Keep reading to learn more about why vendor finance can help your business grow without sacrificing working capital.

Vendor finance doesn’t require collateral

According to Xero, 90 per cent of SMEs face cash flow gaps, resulting in negative cash flow for at least one month each year. Not only can negative cash flow mean that a business is unable to meet its ongoing expenses, such as wages and rent, but it can also hamper its ability to get back in the black and grow. And for those business owners that use their residential property to secure business loans, a downturn can have a domino effect that results in the need to sell the family home to pay down debts in the event of insolvency. Vendor finance helps businesses get the equipment they need to grow without placing a strain on existing funding facilities or using personal property as security.

Vendor finance generally doesn’t require collateral such as residential property because the financier and vendor have a better understanding of the equipment than traditional funders. This understanding includes optimal usage rates, maintenance schedules, and resale channels. As a result, vendor finance allows the asset’s intrinsic value to be calculated accurately at the time of purchase. At the end of the loan term, the financier can get the best price possible for the asset while helping the purchaser arrange finance on a newer, better model where applicable.

Throughout the life of a vendor financing arrangement, the customer isn’t restricted by banking covenants or subject to an annual loan review. Once the contract is executed, all the customer needs to do is meet its regular payment obligations agreed to at the time of purchase. Throughout the finance term, the vendor and financier can advise on optimising asset value, end-of-lease processes, and financing the next equipment purchase — valuable advice which isn’t often available through traditional finance channels. This gives businesses access to the equipment they need while keeping working capital and existing finance facilities available for other expenditure or as a safety net.

More funding structures are available when using vendor finance

One of the other key benefits of vendor finance is the wider availability of loan products compared to those available through traditional channels.

Some of the key financing products available through vendor finance include:

  • Operating leases: The purchaser only pays for the use of the asset while the ownership rights remain with the lessor.
  • Financing leases: The business can buy an asset at the end of the lease by making the residual payment or hand it back to the vendor for resale to cover the residual payment and upgrade to the newest make and model.
  • Secured Equipment loan or Chattel Mortgage: Ownership of the equipment is transferred at the time of purchase with the loan paid off, ideally through income generated with the leased equipment.

With various financing options available, businesses can align their asset purchases and use with project milestones. For example, a civil construction business may win a contract for a major project and take out an operating lease to gain access to the equipment for the project's duration.

At the end of the project, the business simply returns the equipment, and ownership remains with the lessor. It’s an efficient way to gain short-term access to equipment that may not have a long-term or ongoing use for the business. In short, the company can take on the project knowing they can access equipment without additional collateral, incurring the costs and maintenance of owning an asset long term, or the cash flow restriction of buying an asset outright.

Asset and equipment use is optimised for maximum value with vendor finance

When a business deals with a vendor, the transaction is seamless and efficient, with access to assets and financing options available in one place. Maintaining the asset's intrinsic value and working condition is in the customer’s and vendor’s best interests, allowing both parties to work together for the best outcome possible. According to Accelix, 80 per cent of equipment maintenance is reactive when it should be proactive.

With vendor finance in place, your business deals with a financier that fully understands your purchase, so the maintenance schedule and financing arrangements are optimised to best align with your financing and equipment requirements. Further, if your business is under- or over-utilising a piece of equipment, the vendor can work with the customer to optimise the arrangement. For example, the equipment can be swapped between higher and lower use locations, or the finance term can be lengthened or shortened based on usage.

Finance your assets the smart way with Quadrent’s vendor finance solutions

Accessing the finances you need to operate and grow your business without sacrificing working capital is important for businesses of all sizes, especially in a challenging economic environment. Vendor finance provides companies with access to the assets and equipment they need while providing a range of benefits that aren’t available through traditional lenders. By using vendor finance, businesses don’t need to put up other assets such as residential property as loan collateral, more flexible financing options are available, and the vendor will work with the customer to optimise and adjust the arrangement to provide the best outcome possible to both parties.

Vendor finance is not only a smart way to finance business growth, but it also keeps existing funding facilities available as a working capital boost or safety net to bridge occasional cash flow gaps.

Quadrent’s vendor finance solutions help businesses of all sizes access the best equipment without adding pressure to existing funding channels. And through Quadrent’s exclusive regional co-operation agreement with Societe Generale Equipment Finance (SGEF), we provide finance solutions for global equipment manufacturers and distributors. With the ability to structure more flexible funding arrangements compared to banks, along with the expertise of vendor financiers that fully understand their equipment, your asset financing needs are in safe hands with Quadrent.

Contact us today to learn more about how Quadrent’s vendor finance solutions can support your business in acquiring the best assets and equipment without restricting your cash flow.