What is vendor financing?
Vendor financing is when a seller partially funds part of the purchase price for the buyer of a business with the remainder payed after the business is transferred to the purchaser. A loan agreement is then agreed to and generally, the buyer will pay a commercial rate of interest (or higher) on their loan and the seller will hold some form of security on the loan.
This differs to paying for a business by instalments as with vendor finance, the ownership of the business is transferred before the entire purchase price is paid.
Why would sellers use vendor financing?
Vendor financing allows sellers to earn a rate of interest on the proceeds of selling their business that could be greater than they would receive at a bank or other institution.
Vendor financing also lowers the risk profile of your business to potential buyers. This means, prospective buyers who are offered vendor finance terms should be willing to pay more for your business than they otherwise would have offered.
Further, offering vendor finance terms will mean your business is accessible to an increased number of business buyers. This can help to create increase competitive tension and drive better outcomes for you in your transaction.
Why would buyers use vendor financing?
Purchasing a business through vendor financing can be appealing as it avoids the hassles associated with obtaining finance from a bank or other financial institution and can make the transaction more efficient. Vendor financing is also attractive to buyers as it can indicate that sellers have confidence in the future trading performance of the business.
What should buyers look out for with vendor financing?
Buyers should ensure that the interest rate charged by the vendor is competitive; otherwise obtaining finance from a bank may be more affordable. Buyers should also be careful as to how the loan is repaid as this could cause cash flow problems for the business.
What should sellers look out for with vendor financing?
Sellers need to be conscious of the buyer’s likely ability to service the loan post-transaction, and take this into consideration when setting transaction and loan terms. Sellers must also ensure they hold security on the balance payable by the buyer over either the business or other assets owned by the buyer.
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