Quick answer
Vendor finance is when the seller of a business, or sometimes a property, lets the buyer pay part of the purchase price later instead of all at settlement. The unpaid portion becomes a loan from the seller, repaid in instalments under a written agreement. In Australia it often fills the gap between the buyer's deposit and what a bank or other lender will advance.
Key points
- The seller becomes a lender for part of the price, repaid after settlement
- Usually combined with the buyer's own cash and a loan from a bank or non-bank
- Sellers commonly take security over business assets on the PPSR and a personal guarantee
- Other lenders will want to agree who gets paid first if things go wrong
Think of it as the seller agreeing to wait for some of their money. Rather than collecting the whole price on settlement day, the seller hands over the keys, takes a portion now, and accepts the balance in instalments over an agreed period. That deferred balance is vendor finance.
You’ll also hear it called seller finance or a vendor loan. Whatever the name, the buyer owes the seller a debt once the sale completes.
How does vendor finance usually work?
Most business purchases in Australia are funded from a mix of sources. A typical stack looks like this:
- The buyer’s own money, often from savings or equity in a home.
- A loan from a lender, such as a bank, a non-bank or a property-secured lender. See business acquisition loans for how these are assessed.
- Vendor finance covering whatever is left.
The terms are negotiated as part of the sale and written into the contract or a separate loan agreement. They cover the amount, the repayment schedule, the interest the seller charges (if any), whether early payout is allowed, and what happens on default. Some deals are interest-only with one lump sum at the end; others amortise across the term.
What security do sellers ask for?
A seller who is owed money after handing over the business wants protection. The usual tools are:
- A charge over the plant, stock and other business property, recorded on the PPSR so it’s on public record and ranks against later claims.
- A personal guarantee from the buyer’s directors.
- Restrictions in the agreement, for example no selling major equipment or taking on new debt without consent while the vendor loan is outstanding.
Where a bank or other lender is also funding the deal, it will normally require the seller’s claim to sit behind its own. That arrangement is called subordination, and it’s documented so everyone knows who is paid first.
Why vendor finance matters to lenders
Lenders read vendor finance in two ways. On the plus side, a seller prepared to wait on future earnings for payment is a vote of confidence in the business. It also reduces the amount you need to borrow elsewhere, which can bring the deal within a lender’s appetite, particularly where much of the price is goodwill rather than hard assets.
On the other side, vendor instalments draw on the very takings that service every other loan. A lender working out serviceability will add them to your commitments. If the business can’t comfortably carry both, the deal looks stretched.
If you’re mapping out how to fund a purchase right now, outline the deal for us and we’ll work out which lender could fund the part the seller won’t.
Worked example: a café changing hands
A buyer agrees to purchase an established Hobart café for $600k, most of it goodwill plus the fit-out and equipment.
| Source | Amount | Notes |
|---|---|---|
| Buyer’s cash | $150k | From savings |
| Loan secured over the buyer’s home | $300k | Second-ranking behind the home loan |
| Vendor finance | $150k | Repaid monthly over three years |
| Total | $600k |
The seller registers a security interest over the café’s equipment and takes a guarantee from the buyer. The home-secured lender agrees in writing that its claim ranks first. Spread over 36 months, the vendor balance works out at about $4,170 a month before any interest the seller charges, so the buyer checks that the café’s trading history comfortably covers that plus the other loan.
Related terms
- Goodwill: the value of a business beyond its physical assets
- Subordination: agreeing that one lender is paid after another
- Due diligence: checking the business before you commit
- General security agreement: security over all of a business’s assets
Our longer guide on vendor finance when buying a business covers negotiating terms in more detail.
Short on the purchase price?
When the seller will carry some of the price but not enough, the gap usually has to come from a lender. Banks are frequently the lowest-cost choice where the business and your security suit their criteria. If they’ve declined, property-secured and non-bank lenders often look at acquisitions banks won’t.
You can send us the deal in about a minute. There’s no credit enquiry on your file from doing so, and your details aren’t circulated among a long list of funders. One of our people reviews the purchase, then calls you to discuss realistic funding for it. Fill in the price, deposit and vendor amount as precisely as you can so the options we raise genuinely match the deal.
Frequently asked questions
Why would a seller offer vendor finance?
It widens the pool of buyers, can support a better sale price and can help a sale complete when bank funding falls short. It also signals to the buyer that the seller believes the business can carry the repayments.
Is vendor finance secured?
Usually. A seller will often register a security interest over the business assets on the Personal Property Securities Register, ask for personal guarantees from the buyer's directors, or both. The agreement should spell out what happens if instalments are missed.
Can I combine vendor finance with a bank loan?
Yes, and it's common. The bank will want to see the vendor finance terms and will usually insist the seller's claim ranks behind its own, recorded in a deed of priority or subordination.
Is vendor finance the same as an earn-out?
Not quite. Vendor finance is a fixed debt you owe the seller. An earn-out makes part of the price depend on the business hitting future targets, so the amount can change.
Do I need a lawyer for vendor finance?
Both sides should have their own lawyer and accountant. The terms, security, default rights and tax treatment all need to be documented properly in the sale contract or a separate loan agreement.