What is vendor finance?
Vendor finance, sometimes called a vendor loan or deferred consideration, is where the seller agrees to receive part of the purchase price after settlement. Instead of being paid in full on the day, the vendor is paid in instalments over an agreed period.
A simple structure might look like this:
- Buyer’s cash contribution: 25%
- Lender finance paid at settlement: 55%
- Vendor finance paid over two years: 20%
What is lender finance?
Lender finance is funding provided by a bank or non-bank lender. The lender pays its share at settlement, the vendor receives their money, and the buyer repays the lender over time. For SME acquisitions, lender finance is often secured on property the buyer already owns, because goodwill is difficult to lend against. See funding to buy an established business.
How do they compare?
| Factor | Vendor finance | Lender finance |
|---|---|---|
| Who funds | The seller | A bank or non-bank lender |
| When the vendor is paid | Over time | At settlement |
| Assessment | Negotiated with the vendor | Lender’s criteria: security, purpose, credit |
| Security | Often shares, a general security agreement or guarantee | Commonly property, plus business security |
| Flexibility | Terms are negotiable | Terms set by the lender |
| Vendor’s ongoing involvement | High, as they want to be paid | Low after handover |
| Risk to vendor | Business fails before they are paid | None after settlement |
Advantages of vendor finance
It aligns the vendor with your success. A vendor who is still owed money has every reason to introduce you to customers, share supplier knowledge and support staff through the change.
It can bridge a valuation gap. If the vendor wants more than a lender will fund, vendor finance can make up the difference without the buyer overextending.
It signals confidence. A vendor willing to be paid from future profits is showing faith that those profits will continue. A vendor who refuses any deferral may be telling you something.
Disadvantages of vendor finance
The vendor stays in your business. They may feel entitled to comment on decisions while they are owed money.
Security conflicts. Vendors usually want security. If they take a general security agreement over the business’s assets, it may clash with a lender’s requirements.
Default risk for you. If the business has a slow year and you miss a payment, the vendor may have strong remedies, including taking back shares.
Advantages of lender finance
- A clean break. The vendor is paid and exits. You run the business your way.
- Clear terms. Repayments and conditions are set out in the loan agreement.
- Speed. A property-secured loan needs no financials or tax returns for the initial assessment, and in some cases funding can happen within 24 hours of approval.
Disadvantages of lender finance
- Security. You may need to offer property, such as your home, which puts personal assets on the line.
- Cost. Every loan is priced on the individual circumstances, but you are paying for capital that the vendor might have provided on softer terms.
- Lender criteria. Banks can be cautious about goodwill-heavy acquisitions.
How to combine them
Many deals use both. To make it work:
- Agree priority. The lender will usually require first-ranking security. The vendor’s security, if any, sits behind it. A deed of priority records this.
- Match repayment schedules. Make sure the combined repayments to lender and vendor are affordable from maintainable earnings, after your own wage.
- Build in flexibility. Negotiate what happens if a vendor payment cannot be made on time, for example a short deferral rather than immediate default.
- Consider an earn-out. If the disagreement is really about future performance, an earn-out may be better than a fixed deferred payment.
- Get advice. Both parties should take independent legal and tax advice.
A generic example
Example scenario, generic and for illustration only. A buyer agrees to purchase a Hamilton plumbing business. The bank is comfortable funding part of the price against the buyer’s home, but the vendor’s asking price is higher than the bank’s comfort level. The vendor agrees to defer a portion of the price over 24 months, subordinated to the lender’s security. The vendor stays on for three months to introduce key commercial clients.
Where to next
Before choosing a structure, make sure the price is right. Our guide on how to value a small business and our due diligence checklist will help. When you are ready to discuss lender finance, a 60-second enquiry starts the conversation.
Quick answers
Why would a vendor agree to finance part of the sale?
To achieve a higher price, to sell faster, or because the business is hard to fund through banks. Vendor finance also spreads the vendor's income, which can suit their retirement plans.
Do vendors charge interest on deferred amounts?
Often, but not always. It is a matter of negotiation. The agreement should specify any interest, repayment dates and what happens if payments are missed.
Can a lender and a vendor both take security?
Yes, but they must agree on priority. A lender will normally require first ranking, with the vendor's security subordinated. A deed of priority or subordination sets this out.
What happens to vendor finance if the business struggles?
That depends on the agreement. Some deals allow deferral; others treat missed payments as a default. Negotiate realistic terms upfront.