When selling a business, a Seller will need to consider various finance issues as part of the sale process. In another article we will set out some of the considerations that a Seller has in relation to discharging its own liabilities. In this article, we consider the issue of the Vendor providing finance to a Purchaser to enable the purchase of the business being sold (called “Vendor Finance”).

Vendor Finance is an arrangement of finance between the Seller and the Purchaser to assist with paying the balance of a purchase price. For instance, the Purchaser may agree to buy a business from the Seller for $250k but only have $150k in available in finances. In this example, the Seller may agree to advance the remaining $100k to the Purchaser.

Despite agreeing to advance funds, the Seller does not actually physically give the monies. Instead, the Purchaser would pay $150k at completion of the sale and the Seller would forego the receipt of the balance of the $100k on the promise that it will be paid to them over time.

Typically, any arrangement for Vendor Finance will be evidence by way of an appropriate Agreement and depending upon the deal, security should be offered by the Purchaser and its Guarantor.

Advantages of Vendor Finance

Clearly it is not in the Seller’s interest to provide Vendor Finance. Once a business is old a Seller typically would want to move on with its business affairs and wouldn’t want to hang around for payment of the Vendor Finance. However, there are clearly advantages attached to providing Vendor Finance, which include:

  • From a Purchaser’s perspective, Vendor Finance may enable them to purchase the business when they are unable to secure sufficient funds. Also, Vendor Finance may be on terms which are better than what can conventional lenders are prepared to offer.
  • From a Seller’s perspective, the offer of Vendor Finance may be the only way in which a Seller is able to sell its business or alternatively secure the price at which is it prepared to sell the business. Also, the offer of Vendor Finance may speed up the process of finalising a deal – Instead of waiting for the purchaser to be in a situation where it has the funds readily available, the parties can proceed with the deal under an agreement of Vendor Finance.
The Pitfalls of Vendor Finance

Clearly, there is risk attached in a Seller providing Vendor Finance. The Seller is essentially lending money to a Purchaser. As with any loan, there is a risk that the Purchaser/Borrower is unable to make the repayments (either in full or in part). Where Vendor Finance is requested by the Purchaser, it may be indicative that they may be a credit risk for which no lender is prepared to accept. The question then becomes is the Seller prepared to accept a credit risk that has been declined by conventional third party lenders (arguably more sophisticated then a Seller). In summary, the risk of non-payment should weigh heavily upon a Seller before offering Vendor Finance.

Take Outs

Vendor Finance may be an option in a sale that you are considering. There are multiple advantages and disadvantages to utilising a Vendor Finance arrangement. It is often sensible to avoid entering in Vendor Finance where possible. Despite this, there will be situations where Vendor Finance is required to get a deal over the line and in that regard, it is important that both the vendor and purchaser obtain the proper advice.

If you would like to discuss a Business Sale & Purchase or require more information please contact our team.


Written by Cameron Spanner.

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