Vendor finance is a creative way for a firm to fight falling sales. If a customer cannot afford to pay up front, it borrows the funds from the manufacturer. Turnover goes up, of course, but there’s a second win.
Say a business has £10 of stock at the start of the year, buys £100 during the year and ends up with £20 unsold. The ‘cost of goods sold’ expense is £90 (10+100-20). However, if the closing stock is valued at £40, thanks to a recent vendor-financed order at a higher selling price, then the expense falls to £70 (10+100-40).
But there’s a big risk – anyone needing a loan from a supplier to fund purchases could well be in dire financial straits, so there’s a danger the loan will have to be written off.