What is Vendor Financing?
Before discussing vendor financing’s impact on the telecommunications business, it helps to define the practice. Vendor financing occurs when an equipment vendor uses its investment-grade balance sheet to help its customers buy its equipment. While each vendor financing case varies depending on who’s being funded by whom, the service providers requiring vendor financing usually have credit profiles that are weak enough to prevent them from getting all of their funding from other lenders. Also, these service providers typically don’t have enough cash to buy the equipment they need to fulfill their business plans. Cisco, Nortel, and other big equipment vendors won’t talk about what conditions their respective vendor financing arrangements include. But carriers confirm that equipment vendors, for starters, usually finance equipment at a lower rate than would a bank. When it’s clear what the service provider needs, it will usually get term sheets that will detail the amount of financing of
Vendor financing means that manufacturers lend money to their customers, to help them buy more equipment. That probably encouraged some firms to buy more new equipment than they needed, and increased the size of their debts. When growth slowed, and share prices slumped, they were unable to raise money for further expansion. That meant they were unable to pay off those debts, and the balance sheets of equipment suppliers suffered even more. Will interest rate cuts do the trick? Many of the companies with huge debts have decided that they need to cut back dramatically on their spending, whatever the level of interest rates – so rate cuts may be less effective as a policy instrument. The Fed can ease the burden of debt, but it cannot encourage companies to spend money as long as these firms do not see an increasing demand for their products. And it cannot restore company profits through rate cuts in the short-term. However, interest rate cuts may help reassure consumers, who are also burd
Vendor financing is a loan arrangement that takes place between a company and a vendor that supplies a large amount of product to the company. This arrangement is different from extending a credit line, in that vendor financing involves the establishment of a specific amount that will be loaned, and with terms and conditions regarding the repayment of the loan within a specified period of time. Vendor financing is not uncommon in situations where there is a strong working relationship between the customer and the vendor.
