What is vendor finance?
When buying a business, the full purchase price does not always need to be paid to the seller on settlement day.
Sometimes, the seller agrees to leave part of their money in the business and allow the buyer to repay it over time. This is known as vendor finance.
How vendor finance works
Vendor finance is essentially a loan from the seller to the buyer.
For example, imagine you are buying a business for $1 million:
You contribute $300,000
The bank lends $600,000
The seller provides $100,000 of vendor finance
The seller receives $900,000 on settlement, while the remaining $100,000 is repaid under an agreed repayment arrangement.
The vendor loan may be repaid through regular instalments, interest-only payments with a lump sum at the end (aka 'balloon payment', or a single payment after an agreed period.
Why would a seller agree to it?
Vendor finance can help get a deal completed when there is a gap between the purchase price and the funding available from the buyer and the bank.
It can also give the buyer some comfort that the seller believes the business will continue performing after the sale. The seller still has money at risk, so they have an incentive to support a successful transition.
However, the seller is taking on additional risk. If the business struggles or the buyer cannot make the repayments, the seller may not recover the full amount they are owed.
Is vendor finance treated as part of the deposit?
Not necessarily.
A bank may view vendor finance as supporting the transaction, but it will usually still expect the buyer to contribute a meaningful amount of their own money.
The bank will also want to understand the repayment terms. If large vendor repayments are required immediately after settlement, they could place too much pressure on the business’s cash flow.
In many cases, the bank may require the vendor loan to sit behind its own lending. This means the bank is repaid first if something goes wrong.
Terms that need to be agreed upon
The vendor finance arrangement should clearly set out:
The amount being financed
The interest rate
The repayment period
When repayments begin
What security or guarantees are provided
What happens if the buyer misses a payment
Whether the bank must approve repayments
These terms should be properly documented by the parties’ lawyers. The tax treatment can also depend on whether the transaction is structured as an asset sale or a share sale, so accounting advice is important.
Final remarks
Vendor finance can be a useful way to bridge a funding gap and get a business purchase completed.
But it is still debt. The business needs enough cash flow to service the bank loan, the vendor loan and its normal operating costs.
The funding structure should therefore be worked through before the sale and purchase agreement becomes unconditional - not after the deal has already been signed.