Seller Financing
AdvancedSeller financing is an arrangement in which the seller of a business or property lends part of the purchase price to the buyer, who repays it over time, instead of the buyer paying the full price upfront.
Seller financing, also called vendor financing or a vendor loan, is common in sales of small and medium-sized businesses, where buyers may struggle to obtain enough bank finance.
For example, a buyer agrees to purchase a business for 2,000,000. They pay 1,400,000 at completion, funded by their own money and a bank loan, and the seller agrees to receive the remaining 600,000 over five years, with interest, as a vendor note.
Seller financing can help deals happen and may allow a higher price. It also signals the seller's confidence in the business, since they will be repaid only if it continues to perform. Sellers may earn interest on the loan.
The main risk for the seller is that the buyer fails to pay, for example if the business struggles under new ownership. Seller loans are often subordinated to bank loans, meaning the bank is repaid first. Sellers may require security, personal guarantees or covenants. In property, seller financing is sometimes used where buyers cannot obtain mortgages.
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