How Vendor Guarantees Work

What is a vendor guarantee? Vendor guarantees are an alternative to what is more commonly known as purchase order financing. Companies who 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; a more costly and complex form of financing. 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. Once the goods are produced, 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 once the goods have been shipped, and accepted by the end user, that funds generated from the factoring of the invoice will be wired directly to the supplier. The balance between payment of the purchase order and the gross amount of the invoice will then be wired to you.rnIn both instances a one page tri-party agreement is put in place between the factor, you, and the vendor. Let’s say you are in the t-shirt business. Your company receives a very large 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 goods. Why would they not ship the goods? Perhaps you are a young start-up or it's the biggest order you have ever placed with them. You simply 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 against your accounts receivables through invoice factoring. A credit worthy factor with the proper experience can work directly with your supplier to guarantee they get paid. You land a huge 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. They advanced your t-shirt company up to 95% of your invoice amount. You received the remainder, less the factoring company’s fee once the company pays the invoice in full. The supplier is taking a risk if the order is not completed in a timely manner. 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 made 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.