Buying a business

Vendor finance: how to ask the seller to lend you part of the price

Vendor finance lets the seller take part of the price after completion. Here is how your lender treats a vendor loan, and how to ask the seller.

Reading time 5 min read

Category Business guides

Written by The bizbritain team

Vendor finance means the seller agrees to be paid part of the price after completion, instead of all of it on day one. It can close the gap between what a lender will fund and what the business costs. Most lenders accept it, as long as the seller's loan ranks behind theirs.

This guide explains the forms vendor finance takes and how your lender will treat it. It also covers how to raise it with the seller, and what the seller may want in return.

Section 01

What is vendor finance?

It is money the seller leaves in the deal. You still buy the whole business at completion. You then pay part of the price over an agreed period.

It usually takes one of three forms.

Deferred consideration
A fixed amount paid on set dates after completion. It is the simplest form.
A vendor loan note
A written loan from the seller to you, usually with interest. It normally ranks behind the main lender.
An earn-out
A payment that depends on how the business performs after the sale. It can bridge a gap between your price and the seller's.

Earn-outs work differently from a fixed loan. Our guide on how an earn-out works when you buy from a retiring owner covers that route.

Section 02

How does your lender treat a vendor loan?

Most lenders count a vendor loan towards your side of the deal. In their eyes it sits close to your own money. That can cut the cash you need to find.

It only works on the lender's terms. The lender wants to be repaid first, so the seller's loan usually comes with three conditions.

It ranks behind the main loan if things go wrong.
It cannot be repaid early without the lender's agreement.
Its repayments can be paused if the business falls behind on the main loan.

These terms are set out in writing between you, the seller and the lender before completion. The document is often called a deed of priority.

You still have to repay the seller. The business's cash flow must cover the main loan and the vendor loan together.

Our guide on how much deposit you need to buy a business explains what else counts as your contribution.

Myth 01

“A seller will never wait for their money”

Many sellers do accept part of the price later. It can help them get the price they want. That is especially true when they trust the buyer to run the business well.

Asking the question is a normal part of a deal.

Section 03

How to raise vendor finance with the seller

Timing matters. A request that arrives late can look like a deal in trouble.

Step 1

Work out the gap first

Find out roughly how much a lender will fund and how much you can put in. The difference is what you are asking the seller to defer.

Step 2

Put it in the heads of terms

Raise it early, when the main terms of the deal are agreed. Say how much is deferred, over what period and whether interest is paid.

Step 3

Explain what the lender will need

Tell the seller early that their loan will rank behind the bank. A seller who hears this at the last minute may lose confidence in the deal.

What would make waiting worthwhile for the seller?

Section 04

What the seller may want in return

A seller who waits for part of the price takes some risk. They may ask for interest on the loan, a shorter repayment period or regular updates on how the business is doing.

Sellers may also have tax reasons for preferring a payment now or later. They should take their own advice on that.

This is where an acquisition finance broker can help. We can look at the deal across a wider range of lenders and work out how a vendor loan fits beside the main facility.

You pay bizbritain nothing unless a lender on our panel issues an Agreement in Principle. On advisory deals, we take no commission from lenders.

This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.

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