Vendor notes: all you need to know

Insufficient working capital can crimp business growth by making it impossible to buy the inventory and equipment orgnaisations need when they need it. But there’s an answer to this problem – vendor note loans  – direct financing from sellers to their customers that makes it easy for them to buy the goods they require. 

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    Chris Godfrey

    Page written by Chris Godfrey. Last reviewed on July 11, 2024. Next review due April 6, 2025.

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    What is a vendor note?

    A vendor note is a contract for a loan from a seller, (vendor), to the buyer of their products. The vendor lends the buyer the value of the sold goods and is repaid by regular instalments, or by a lump sum at a fixed future date. A form of asset finance, vendor loans – also called vendor financing – are ‘buy now pay later’ lending schemes between the vendor and the buyer. Some vendors may provide the capital for these loans themselves. Others may utilise the capital and services of an external finance provider. 

    Vendor loans can be good for sellers wishing to expand their sales network, maintain good customer relationships, or even clear old inventory or introduce new products. Vendor notes can be good for buyers who do not have sufficient working capital to purchase the goods they need for cash, or a credit record that lets them buy the inventory or equipment with a traditional small business loan. Vendor loans typically indicate a good business relationship between the vendor and the customer, as the vendor is trusting their client to pay when more formal lenders may not accept the risk.

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      How do vendor notes work?

      Vendor notes are deferred loans. This means the vendor chooses to wait for payment for the products they sell by lending the buyer the cash value of the goods. The vendor can be repaid by regular instalments, or via a lump sum at a future date. The goods act as collateral for the loan, and the vendor will usually demand an initial deposit at the start of the contract and add interest to the note. Because of their increased risk, vendor notes usually come with higher interest rates than traditional bank loans. Depending on the type of goods being financed, repayment periods for vendor notes can vary significantly – from a few months up to five years or more.

      Example of a vendor note

      A small engineering firm needs to purchase new machinery at a cost of £100,000, but cashflow difficulties prevent them from buying the equipment for cash. They also cannot pay the vendor of the machinery on normal invoice terms of 30, 60 or 90 days, as they will need more time to pay. Instead of seeking more formal bank financing, the engineering firm requests a vendor loan.

      In this case, the vendor has their own in-house financing department, who arrange a vendor note to furnish the loan. At contract signing, the engineering company pays a deposit of 10% – £10,000 – and takes receipt of the machinery. The remaining balance of £90,000, plus interest is repaid over 24 equal instalments. In cases where the vendor does not have their own in-house financing option, a third-party lender working with the seller will provide the vendor note and the capital for the loan.

      Does a vendor note transfer ownership of the goods to the buyer?

      No. The vendor retains ownership of the sold inventory or equipment until they are paid for in full, plus interest and any fees. 

      Is other collateral (security) needed with a vendor note?

      It may be. Usually, the sold goods act as security for the loan, but in some cases, the vendor may ask for further collateral – such as a lien on the borrower’s business assets.

      What happens if the buyer defaults on a vendor loan?

      The vendor may repossess the inventory or equipment that was sold, claim against assets used as supplementary collateral, or may be entitled to the buyer’s future cashflow.

      When would you use a vendor note?


      • To expand customer networks and lock out competing sellers.
      • To support sales discounting – recoup the reduced sales price from the interest on the loan.
      • As a sales promotion.
      • To create opportunities to upsell products and increase the value of each sale.
      • To introduce new products on favourable finance terms.


      • To preserve working capital for other business needs.
      • To receive a discount off the price of the purchased goods.
      • When cashflow will not support buying with cash.
      • When the buyer cannot obtain more formal financing.
      • When the buyer needs more time to pay than standard vendor invoicing will allow.

      What are the advantages of vendor notes?


      • Allows buyers to purchase goods regardless of their cashflow or credit history.
      • Opens sales channels to more potential customers.
      • Supports higher value sales.
      • Generates supplementary revenues from interest and fees.
      • Can create a sales advantage over competitors.


      • Allows buyers to buy now and pay later – get the goods they need without waiting.
      • May generate a sales discount.
      • Takes the strain off cashflow.
      • Typically comes with lower upfront cost than many other forms of borrowing.
      • Deal directly with the manufacturer or distributor.

      What are the disadvantages of vendor notes?


      • Risk of buyer default.
      • Deferring payment can affect your cashflow unless you work with a third-party lender.
      • Increased administration and costs for vendors who provide in-house financing.


      • Higher interest rates than traditional bank lending.
      • Buying used goods may not give access to manufacturer incentives and discounts.
      • Vendor loan may not cover all the costs, such as servicing and equipment-user training.

      Are vendor notes right for my business?

      Vendor notes are a good solution for sellers who wish to accelerate their sales stream, increase turnover, and upsell inventory and equipment to increase the value of each sale. Plus, customers who borrow from you are more likely to become long-term clients who will buy again and again.

      For buyers, vendor notes are an ideal way to get the inventory and equipment they need when they need it instead of waiting for cashflow to improve.

      Get started with Swoop

      Vendor notes are a great way to increase business opportunities and create long-lasting vendor/customer relationships. However, for vendors, setting up an in-house financing department can be costly and time-consuming, and it may place unwelcome strain on cashflow. Working with a lending partner who can provide the necessary capital, vendor lending experience and loan administration may be a better way to go.

      Swoop has access to vendor-finance lenders, with terms and conditions to suit every vendor’s business situation. Make your business grow faster with the best vendor notes and financing today.

      Written by

      Chris Godfrey

      Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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      Swoop requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

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