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 take you through the definition, the pros and cons and for whom it is a suitable form of financing.
What is a vendor loan?
A vendor loan is a form of deferred payment. The seller agrees not to receive part of the purchase price until a later date, allowing the buyer to complete the deal with a small amount of financing. It is based on a loan agreement from the seller to the buyer, which is why we also know a vendor loan as the 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.
Advantages and disadvantages 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.
Vendor loan alternatives
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 close the gap between asking price and buyer's offer. The earn-out arrangement allows a portion of the purchase price to depend on future performance;
- Subordinated loan - The seller doesn't want to pull off the sale, but the buyer can't get the financing. A loan can be provided, but there are conditions attached to the repayments. In fact, subordinated means that repaying the bank loan always comes first.
