Vendor finance — where the seller provides part of the purchase price as a loan to the buyer, repaid over time from the business's earnings — is a legitimate deal structure in Australian business sales. It is not a workaround for a business that cannot attract conventional financing. When used correctly, it can benefit both parties and get deals done that would otherwise stall.
How vendor finance works in practice
In a typical vendor finance arrangement, the buyer pays a deposit at settlement — usually 50–70% of the purchase price — and the seller finances the remainder as a loan. The loan is repaid over an agreed period, typically two to five years, with interest at a commercial rate. The seller retains a security interest in the business assets until the loan is repaid.
Example: A business sells for $1,200,000. The buyer pays $800,000 at settlement. The seller provides $400,000 in vendor finance, repayable over three years at 8% per annum. The buyer makes monthly repayments of approximately $12,500 from the business's cash flow.
When vendor finance makes sense for sellers
- The business is genuinely good but hard to finance conventionally. Some businesses — particularly those with intangible-heavy balance sheets, or in sectors that banks are cautious about — are difficult for buyers to finance through a bank. Vendor finance can bridge that gap without reducing the price.
- You want to maximise the sale price. Sellers who offer vendor finance often achieve a higher headline price than those who insist on all-cash settlement. The buyer is paying for the flexibility, and that premium can more than offset the financing risk.
- You have confidence in the buyer and the business. Vendor finance only makes sense if you believe the business will continue to perform under the new owner. If you have doubts about either, all-cash settlement is the safer option.
- Tax timing. Vendor finance can spread the capital gains tax liability across multiple financial years, which may be advantageous depending on your circumstances. Discuss this with your accountant before agreeing to any structure.
The risks for sellers
The primary risk in vendor finance is that the buyer defaults. If the business underperforms after settlement and the buyer cannot make the repayments, you are in the position of either taking the business back (with all the operational complexity that entails) or pursuing the buyer for the outstanding debt.
Mitigating this risk requires: a thorough assessment of the buyer's capability and financial position before agreeing to vendor finance; a properly documented loan agreement prepared by your solicitor; a registered security interest over the business assets; and a clear default and remedy process in the agreement.
What buyers need to understand
Vendor finance is not free money. The interest rate is real, the repayment obligation is real, and the seller retains a security interest in the business until the loan is repaid. Buyers who take on vendor finance need to model the repayments carefully against the business's projected cash flow — and build in a buffer for the inevitable surprises in the first year of ownership.
Structuring vendor finance properly
A vendor finance arrangement must be documented by a solicitor — not just agreed verbally or in a heads of agreement. The loan agreement should cover: the principal amount; the interest rate and calculation method; the repayment schedule; the security interest and how it is registered; the events of default; and the remedy process. Your broker can help structure the commercial terms. Your solicitor documents them.
