A vendor loan is a loan that the seller provides to the buyer during a business acquisition: the buyer pays a portion of the purchase price at a later date, based on a loan agreement. This allows the buyer to complete the acquisition with less of their own financing. A vendor loan is also sometimes referred to as a seller’s loan or seller’s credit.
There are different ways to finance a business acquisition and a vendor loan can be part of the total financing sum.
In this article, we’ll walk you through the definition, the pros and cons, and who this form of financing is suitable for.
What is a vendor loan?
A vendor loan is a form of deferred payment. The seller agrees to receive part of the purchase price at a later date, allowing the buyer to close the deal with minimal financing. It is based on a loan agreement between the seller and the buyer, which is why a vendor loan is also known as a seller’s loan or seller’s credit.
The selling party has a better chance of a successful sale when they think with the buyer about the financing issue. If there is a good understanding, the buyer may be able to approach the seller for a vendor loan.
What are the pros and cons of a vendor loan?
The benefits are probably self-explanatory, but we list them for you anyway:
- Provides a bond of trust between buyer and seller (which in turn motivates any other investors);
- Get financing more easily.
Of course, there are downsides, as no business acquisition is risk-free. Here are the main points to consider if you want to use a vendor loan:
- If the buyer cannot meet the financial obligations, the seller has the right to tap the company's dividends;
- For the seller, working with a deferred payment is a gamble;
- Due diligence must be done to investigate the buyer's position;
- Securing the contractual part optimally can be quite a challenge.
What are the alternatives to a vendor loan?
The vendor's contribution can also be reflected in other ways. These are the alternatives of a vendor loan:
- Earn-out arrangement - This arrangement is used to bridge the gap between the asking price and the buyer’s offer. The earn-out arrangement makes it possible to tie a portion of the purchase price to future performance;
- Subordinated loan - The seller doesn’t want the sale to fall through, but the buyer can’t secure financing. A loan can be provided, but the repayments are subject to certain conditions. “Subordinated” means that repayment of the bank loan always takes priority.
Frequently Asked Questions About the Vendor Loan
What is a vendor loan?
A vendor loan, also known as a seller loan or seller credit, is a form of deferred payment used in a business acquisition: the seller does not receive part of the purchase price until a later date, allowing the buyer to close the deal with less financing.
What are the benefits of a vendor loan?
A vendor loan fosters a relationship of trust between the buyer and the seller, which also serves as an incentive for any other potential investors, and makes it easier for the buyer to secure financing.
What are the risks of a vendor loan for the seller?
For the seller, a vendor loan is a gamble because payment is deferred. If the buyer fails to meet their financial obligations, the seller does have the right to claim the business’s dividends. In addition, due diligence must be conducted to assess the buyer’s financial position, and properly documenting the terms in the contract can be quite a challenge.
What are the alternatives to a vendor loan?
The two main alternatives are the earn-out arrangement, in which part of the purchase price depends on future performance, and the subordinated loan, in which repayment is made only after the bank loan has been repaid.
What is the difference between a vendor loan and an earn-out?
With a vendor loan, the loan amount is fixed in advance, and only the payment is deferred. With an earn-out, the amount itself is uncertain, because part of the purchase price depends on the business’s future performance.
