How does Vendor Guarantees Work?

What is Vendor Guarantee?

Vendor guarantee is an alternative to purchase order financing. Companies that need capital to purchase goods from their vendor and have it drop shipped directly to their customer usually seek a form of Purchase Order Funding, which is typically costly and complicated. However, vendor guarantees are considerably cheaper, quicker, less complicated, and can aid in building credit with vendors.

Essentially, the supplier is relying on the credit and guarantee of a factoring company for payment of the goods. In a supplier guarantee, the vendor must at least agree to produce the goods initially.

After the production of goods, we can provide two different guarantees to the vendor:

  • Upon receipt of funds from the factor, the supplier agrees to ship the goods directly to the end-user.
  • The factoring company will guarantee the vendor that upon shipment of goods and acceptance by the end-user, the funds generated from the factoring of the invoice will be wired directly to the supplier. The company will then receive the balance between payment of the purchase order and the gross amount of the invoice.

In both instances, a one-page tri-party agreement is put in place between the factor, you, and the vendor.

Example of Vendor Guarantee

Let’s say you are in the t-shirt business. Your company receives a huge t-shirt order from a big-box retailer like Wal-Mart. You need to buy the raw goods from your supplier, but the supplier will not ship the products. Why would they not send the goods? Perhaps you are a young startup, or it’s the most significant order you have ever placed with them.  You do not have enough credit to supply all the goods to fulfill the order. They have cold feet, and that is when a vendor guarantee comes into play.

A factoring company with excellent credit can leverage your accounts receivables through invoice factoring. A creditworthy factor with the proper experience can work directly with your supplier to guarantee they receive the payment. You land a massive order from Wal-Mart, and your vendor gets guaranteed cash. It can be the perfect win-win-win scenario all parties involved are looking for.

The factor purchases your accounts receivables from the large order and pays your supplier before paying you. Your t-shirt company gets a 90% advance of your invoice amount. You then receive the remainder, less the factoring companies fee once the company pays the invoice in full.

The supplier is taking a risk if the order is not completed on time. The supplier will only consider doing this type of transaction if the relationship between all parties is excellent, and they are comfortable payment will be done on time.

When a company has a large opportunity and has good relationships with their supplier, vendor guarantees can get you the critical working capital you need to grow your business.

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How does Vendor Guarantees Work?

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