what is a vendor note 
a vendor note is a short term loan a vendor makes to a customer that is secured by goods the customer buys from the vendor a vendor note is classified as a form of vendor finance or vendor financing which is a type of lending that usually takes the form of a deferred loan made by a vendor vendor notes are most likely to be employed when a vendor has more confidence in a customer s business prospects than a traditional lender a bank would understanding vendor notesvendor notes can be a useful and convenient form of financing particularly when well established vendors with diverse customer bases are taking on new smaller buyers who typically have small amounts of working capital with which to purchase inventory or essential goods in some cases customers may be entirely dependent on vendor note financing to secure vital inventory or equipment the use of such vendor financing can make it easier for a company to increase sales volume and revenue but in doing so it also incurs the risk of the buyers it finances not paying back their loans vendor note loans are often secured by the inventory being sold to the buyer but may also be backed by pledges of the buyer s business assets or cash flow the use of a vendor note will generally denote a good relationship between vendor and customer terms of vendor notesvendor notes vary in terms of their time to maturity but notes with time horizons in the range of three to five years are considered common many different types of terms and conditions can be built into a vendor note such as limitations on the types of business practices the buyer can engage in restrictions on acquiring other inventory or business assets and requirements that specific financial ratios or benchmarks be maintained while vendor notes tend to amount to deferred loans sometimes there may be an interest charge on the borrowed sum the value of goods that has changed hands while vendors would doubtlessly prefer to be paid immediately for goods or services they render maintaining a relationship by helping with financing and being paid back over time sometimes with interest is better than no sale at all advantages and disadvantages of vendor notesdepending on the inventory or equipment you plan on buying vendor notes or vendor financing in general come with some advantages and disadvantages it s important to make sure whether vendor financing or a traditional bank loan will be a better option for your business one of the primary advantages of a vendor note is purchasing equipment at a good value many vendors have in house financing departments that offer customers discounts on the items they need for their business as the product and financing are coming directly from the manufacturer the deal you receive may be better than you d find elsewhere making it an attractive option another strong selling point of a vendor note is the ease of obtaining the purchase and financing simultaneously a manufacturer wants to make the sale and understands the product provided the financing for them is straightforward a bank on the other hand will have to evaluate the manufacturer the product being sold and the buyer which is a much longer process there are generally two types of vendor financing debt financing such as a vendor note and equity financing where the vendor receives stock or equity in the business obtaining financing directly from the vendor also typically comes with lower upfront costs and it is easier to update your equipment over time since you are dealing directly with the manufacturer one of the main disadvantages of vendor notes is if the vendor does not have an in house financing department and you have to deal with a third party non bank financing entity if this entity is not familiar with the vendor or the equipment it may charge a higher interest rate or finance only a small portion of the cost in addition if you are purchasing used equipment the costs may also be higher because the manufacturer incentives no longer apply and the vendor will take that into consideration when pricing the financing lastly some vendors will only provide financing for the equipment but not include any other terms that may benefit your business including transportation and training costs discounts on purchasesease of obtaining purchase and financing simultaneouslylower upfront costssimpler to update equipmenthigher costs via third party financingpurchasing old equipment may be more costlyless coverage in financing termsexample of a vendor notea new medical office buyer wants to acquire a laser device used for special outpatient surgeries at a cost of 1 000 000 it has just 100 000 to spend rather than going to a lender to ask for a business loan a medical device vendor will offer the piece of equipment to the customer under the agreement that the medical office buyer pays back the 900 000 balance of the medical device over a period of five years at an interest rate of 2 as such the vendor will carry a note until the 900 000 is repaid the buyer gets the device which will add a revenue stream the seller gets a sale and pockets the interest on the loan it may also get follow on business from the buyer 