Vendor finance: when the seller lends you part of the price

Most business sales stall on the same problem. The buyer can fund most of the price but not all of it, and the bank won’t lend against goodwill alone. Vendor finance solves that gap with the one party who already knows the business inside out: the seller. Instead of taking the full price at settlement, the seller agrees to collect a slice of it over the following months or years.

Done well, it gets deals over the line that would otherwise collapse. Done carelessly, it leaves a retired owner chasing instalments from a struggling buyer. Here’s how to get it right from both sides of the table.

How a vendor-financed purchase is put together

A typical structure has three sources of money:

1. The buyer’s own cash as a deposit.
2. A senior loan from a bank, non-bank or private lender, paid at settlement.
3. The vendor loan: the part of the price the seller agrees to receive later.

Take a café with a $600k sale price. The buyer puts in $150k, a lender advances $330k, and the seller agrees to take the remaining $120k over three years in monthly instalments. At settlement, the seller walks away with $480k and a signed loan agreement for the rest.

The vendor loan is documented separately from the sale contract and usually covers:

• how much is owed, over what period, and how often instalments fall due;
• interest (if any) and when it’s paid;
• the security the vendor takes;
• guarantees from the buyer’s directors;
• events of default and what the vendor can do about them;
• whether the buyer can repay early without penalty.

Why sellers agree to it

It can sound like a favour to the buyer. Usually it’s in the seller’s interest too.

• A bigger pool of buyers. Many capable buyers have a deposit and a lender but come up short on the last piece. Offering terms can turn a slow sale into a quick one.
• A better price. Sellers who offer terms often hold out for a firmer price than a cash-only sale would get.
• Interest income. If the agreement charges interest, the seller earns a return on the deferred amount.
• Confidence for the bank. A senior lender may be more willing to fund a purchase when the outgoing owner still has money riding on the business performing.

From the buyer’s side, the seller agreeing to wait is one of the strongest due diligence signals you’ll get. Owners who doubt their own numbers rarely want to be paid from future profits.

How lenders treat a vendor loan

If you’re using a bank or other lender for the senior piece, the vendor loan affects your application in three ways:

What the senior lender checks	What it means for you
Ranking	The lender will almost always insist on first-ranking security. The vendor signs a priority or subordination deed agreeing to sit second.
Serviceability	Vendor instalments are debt repayments. The lender adds them to your loan repayments when testing whether the business’s cash flow covers everything.
Repayment restrictions	Some lenders limit payments to the vendor if the senior loan falls behind, or require the vendor loan to be interest-only for a period.
Equity contribution	Lenders want real buyer cash in the deal. A vendor loan can reduce the senior loan, but rarely replaces the buyer’s deposit entirely.
Seller’s ongoing role	If the seller is staying on for a handover, lenders like to see that in writing.

Before you commit to a structure, test it with our debt service coverage ratio calculator, including both sets of repayments. If the cover is thin, a longer vendor term or a period of interest-only payments may make the numbers work.

Need a senior lender to sit behind a seller’s offer? Send us the deal. The form is quick, and our review leaves your credit report alone.

Security: what the vendor should insist on

A seller who lends without security is an unsecured creditor, and in a failure they’d be near the back of the queue. Sellers who protect themselves typically ask for:

• A general security agreement over the business’s present and after-acquired property.
• Registration on the PPSR. Lawyers who act on these sales stress that a security interest that isn’t registered correctly and promptly can leave the vendor ranking with unsecured creditors if the buyer’s company fails. Registering is quick and inexpensive; leaving it out is a costly mistake.
• Director guarantees where the buyer is a company, so the people behind it are personally responsible.
• Sometimes a mortgage over property the buyer owns, or a share pledge over the purchasing company.

If there’s a senior lender, the vendor’s security will usually be second-ranking. That’s normal, but it means the vendor should read the priority deed carefully, especially any clause that stops them enforcing for a period after a default.

The tax timing trap for sellers

Here’s the detail that catches out many vendors. Under the ATO’s general capital gains tax rules, when you sell an asset under a contract, the CGT event usually happens when the contract is entered into, not when you’re paid. A seller who agrees to receive $120k over three years may be assessed on the whole gain in the year the contract is signed.

That can mean paying tax on money not yet received. Small business CGT concessions may reduce or remove the gain for eligible sellers, and an accountant can tell you how your deal will be treated. Raise it before signing, because the answer may change how much deposit you want upfront or how you structure the repayments.

Vendor finance vs earn-out vs a lender

These three get mixed up, so here’s the short version:

• Vendor finance. A fixed amount owed by the buyer, repaid on a schedule regardless of how the business performs.
• Earn-out. A portion of the price hinges on how the business performs later, such as profit in the first two years. If the targets aren’t met, less is paid. Earn-outs are often unsecured.
• A third-party lender. Pays the seller in full at settlement; the buyer owes the lender instead. See business acquisition loans and our guide to finance for buying a business.

Many deals use two or all three.

Pros and cons for the buyer

Pros

• Smaller deposit and smaller senior loan
• Terms are negotiable directly with the seller, sometimes including an interest-free period
• The seller has a reason to make the handover succeed
• Can unlock deals the bank wouldn’t fund on its own

Cons

• Another set of repayments to meet from day one
• Director guarantees put personal assets at risk
• A falling-out with the former owner becomes a falling-out with your creditor
• Default clauses can let the seller demand the full balance

Common situations where it works

• Retiring owners selling to a long-serving employee or manager. See succession and exit planning finance.
• Partner buyouts, where the departing partner accepts payment over time. Our page on buying out a business partner covers the other options.
• Franchise resales, where the franchisor’s approval and the senior lender’s appetite both matter.
• Land on terms, where a property seller accepts instalments. The legal rules for terms contracts differ by state, so get local legal advice.

Need the rest of the purchase price funded?

Having the vendor carry a portion of the price helps enormously, but it rarely covers the whole gap. Most buyers still need a senior loan for the bulk of the purchase, sometimes secured against property they own, sometimes against the business itself.

Finding that senior piece is our job. The enquiry form is a minute’s work, and nothing runs against your credit rating just for asking. One team handles what you send; it isn’t passed around a crowd of lenders who then ring you one after another. A specialist goes through the purchase, the vendor terms on offer and your deposit, then calls to talk it through. Be precise about the price, the vendor loan and what you’re contributing, and we’ll know straight away which lenders are worth your time.

Get the senior funding sorted →