Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Vendor Note

What it is:

A vendor note is a short-term loan to a customer.

How it works (Example):

Let's say you plan to purchase inventory from Company XYZ  for $2 million. You only have $200,000 in cash and want to pay Company XYZ over time for the rest. Essentially, you’re borrowing $1.8 million from the seller, and the seller is "carrying a note" until you pay back that $1.8 million. The seller will charge interest that may be a rate that is lower, the same as, or higher than what the buyer might get from a bank or other lender.

In many cases, the vendor might require collateral (i.e., the inventory or a claim on cash accounts, for example) to ensure that the buyer pays.
 

Why it Matters:

Vendor notes are a great way to acquire inventory, but they usually require a solid relationship between the buyer and seller. From the vendor's perspective, it may not be paid for a sale right away, but receiving the cash over time is often better than not receiving it at all (plus the earned interest). When vendors sell high-price items such as cars to auto dealers or medical equipment to hospitals, vendor notes become a crucial sales advantage.

In some cases, new buyers are especially dependent on vendor notes if they cannot qualify for bank loans or other financing to acquire inventory.