Vendor finance: when you lend the buyer the money for your business

Vendor finance, also called seller finance, is when you sell your business and let the buyer pay part of the price later, as a loan from you. It usually comes up when a bank won't lend the buyer the full amount. You're repaid out of what the business earns after you hand it over, so the real question is whether it keeps performing without you.

The offer looks good. Then you read the detail. The buyer's bank will lend most of the price, but not all of it, and the buyer wants to know if you'll carry the rest.

That's vendor finance. You've just been asked to become the lender.

Before Clarity, I worked in corporate finance raising capital for owner-led businesses. I watched buyers and lenders put a price on how much a business depended on its owner, in real deals. Vendor finance is where that price lands on your side of the table.

What is vendor finance when you sell a business?

The loan is part of the sale itself, usually with interest and a repayment schedule. business.gov.au lists the method of payment as one of the terms a sale agreement sets out, and suggests getting a lawyer to draw up the contract.

Vendor finance, seller finance and seller notes: the same thing

You'll hear vendor finance, seller finance and seller note. They all describe the same thing, the seller lending the buyer part of the price.

Why "vendor finance" means something else in property

In property, it's a home seller offering the buyer private finance, such as a wrap loan or a rent to buy scheme, and the Queensland Government warns home buyers about those deals. Different thing. This guide is about selling a business.

How does vendor finance work in an Australian business sale?

What the agreement usually covers

Your lawyer drafts it, but it helps to know what goes in:

• how much you're lending
• how long the buyer has to repay it
• whether there's interest, and how much
• when each repayment falls due
• what counts as a default, and what happens then
• what security you hold
• what the buyer reports to you while the loan is open

That last one is easy to skip. Once you've handed over, you won't see the numbers unless the agreement says you will.

And if there's interest, it's income. The ATO says that if you're an Australian resident and you receive interest, you must declare it as income. Your accountant will tell you how that applies.

Where it sits next to the buyer's bank loan

Business Queensland says buyers generally finance a purchase through a loan from a bank or other lender. So there can be 2 lenders with a claim on the same business, the bank and you. ASIC explains that between 2 secured creditors, priority is generally decided on a first in time basis. In plain terms, the one who got in first usually ranks first. Who ranks where in your deal is for your lawyer to sort out before settlement.

Why buyers ask for it

Business acquisition loans: when the bank won't lend the full price

Can a buyer get a business acquisition loan in Australia? Generally, yes. Business Queensland tells buyers to talk to their bank or lender as early as possible about getting a loan and the documents it needs.

How hard it is depends on the business more than the buyer, in my view. A lender lends against what the business can show it, and a business that only works with its owner in the chair is harder to show. When the loan comes up short, the buyer looks for the rest. Their own money, a partner, or you.

Management buyout finance: vendor finance when your team buys

When your own managers buy the business, vendor finance is often part of how it's paid for. They put in some of their own money, borrow what they can, and the owner is often asked to cover some of what's left. How much depends on what a lender will lend your team, and that comes back to how much of the business they already run. The full picture is in our guide to a management buyout.

What you are still betting on

Think about where the repayments come from. The buyer pays you back out of what the business earns after you've handed it over. So if the key accounts, the pricing and the big decisions still run through you, the repayments run through you too. And you won't be there.

You've let go of the steering wheel. Whether the thing drives itself now decides whether you get paid.

So before anyone talks about the interest rate, ask yourself one thing. Would this business keep paying me if I stopped answering the phone?

Why the size of the loan tells you something

Every dollar the bank won't lend is a dollar someone else has to believe in. With vendor finance, that someone is you.

So when the buyer asks you to carry a big share of the price for a long time, it's fair to ask why the bank wouldn't. In my experience the answer usually comes back to how much of the business is you.

How much of the price is usually vendor financed? There's no reliable Australian figure I can point you to. It varies with what a lender will lend, and that varies with how much the business depends on you.

Vendor finance and earn-outs: one bet, 2 ways of paying

They're different arrangements. With vendor finance, the amount is agreed and owed. With an earn-out, the ATO describes a right to further payments that depend on how the business performs for a period after the sale.

But both get paid out of the business after you've stepped back. That's why both depend on it running without you.

The ATO has its own rules for earn-outs. Don't assume they apply to a vendor loan. That's one for your accountant.

How sellers protect themselves

None of this should scare you off. It needs setting up properly, by the right people on your deal team, before you sign.

Security and the PPSR

Start with what happens if the buyer's company fails. ASIC says a secured creditor will generally have priority over an unsecured creditor, and that the liquidator will only pay unsecured creditors if there are funds left after the costs of the liquidation and payments to secured creditors and employees. ASIC's guide for creditors sets out the order.

The way to secure your interest is to register it. ASIC suggests registering your interest and getting legal advice on how to secure it under a contract. The register is the Personal Property Securities Register (PPSR), and its own guide puts it plainly. "Having a written agreement is important, but it might not be enough if the other party goes out of business." (PPSR, Protecting your business assets)

Timing counts too. Some registrations have a time limit, and the PPSR says if you don't register within the time frame, you can lose the priority you'd otherwise claim. Your lawyer will know which rules apply to your deal.

Be honest. Do you know where you'd rank today if the buyer's company went under?

Personal guarantees and reporting

Your lawyer may also raise a personal guarantee from the buyer, so you have someone to go to if the company that owes you can't pay. Whether it suits your deal is for them to advise on.

Then there's the reporting. Agree what numbers you'll see while the loan is open, and what happens if a repayment is late. Your lawyer will word it.

Tax timing

Do you pay capital gains tax before the vendor finance is repaid? The ATO says that "if there is a contract of sale, the CGT event happens when you enter into the contract". So the tax clock can start long before the last repayment reaches you.

The small business CGT concessions have their own eligibility conditions, and your accountant should check how the structure of your deal affects them. There's more in our guide to tax when you sell a business.

Is vendor finance a good idea for your sale?

It can be. It widens the pool of buyers who can afford you, and it can make a sale to your own team possible when the bank alone wouldn't. If you're earlier on, here's how a sale works from start to finish.

In my view, it suits a business that already runs without its owner far better than one that doesn't. You're the one carrying the risk, so you want the business carrying the work.

A quick way to check. Open your calendar for the last 2 weeks and sort every meeting into 2 piles. The first is meetings you only needed to know happened. The second is the ones you ran, approved, steered or got pulled into. If the second pile is the big one, think hard before you lend against the business.

Make the business the security

The best protection for a vendor loan is a business that already runs without you, and can prove it. That means getting the decisions, the customer relationships and the money off you before the sale. That's Sale Readiness, and preparing the business for sale is where it starts.

A dated record of what's changed and what now runs without you is something a buyer's bank can look at too, and the more they can lend against, the less of the price is left for you to carry.

If you want to know where you stand today, get your Independence Score.

So when the buyer asks if you'll carry the rest, you'll know what you're betting on.

Frequently asked questions