Vendor financing is often a great source of capital. As the name implies, vendor financing occurs when a company receives capital from one of its vendors or suppliers.

Vendor financing is actually one of the most popular forms of debt financing for companies. Vendor debt financing is often known as "trade credit," and is when a vendor sells you a product or service and you don't have to pay right away, but rather the debt either needs to be paid in full within a certain period or periodic payments with interest are required.

An example of debt-based vendor financing is Dell, which through its subsidiary Dell Financial Services, gives extended terms on purchasing Dell Computers. Suppliers to companies like Home Depot and AutoZone are forced to offer vendor financing (these retailers often do not pay their suppliers for 90 days or more).

Vendor Financing Is Not Always Trade Credit

However, sometimes vendors provide both interest-free or equity-based financing for the following reasons:

• To gain a built-in customer base. By funding your business, you will buy more, and they will sell more, (now or in the future) of their products and/or services

• Loyalty: you will be more loyal to the vendor

• Learning/market research: the vendor will have you as a closer customer and will learn ways from you to improve their products and services

• Equity upside, if they make an equity investment and your company has a significant liquidity event in the future

Vendor equity financing is often similar to strategic/corporate investing, particularly if the vendor is not currently supplying the company.

Pfizer is an example of a company that has invested in many current and potential suppliers, such as Genomic Health Inc., a developer of a cancer diagnostics, Avid Radiopharmaceuticals Inc., a molecular-imaging company, and Entelos Inc., which develops computer models of disease.

Likewise, a great example of a vendor success story is Kenneth Cole, who got an Italian shoe manufacturer to manufacture shoes for him via a line of credit (i.e., Cole didn't have to pay for the shoes until he sold them).

Vendor Financing Often Provides MORE than Just Capital

Perhaps what I like about most about vendor financing is that oftentimes vendors provide more than just capital; they can provide relationships and immense industry knowledge, and can even modify its entire business and/or create new business lines to support your venture.