Vendor financing: how a seller loan works

Vendor financing — also called seller financing or a seller loan — means the seller leaves part of the price as a loan to the buyer. The buyer pays the rest in cash on the takeover date and repays the seller loan over an agreed period with interest. It is one of the most common ways to get a deal done when the bank loan and the buyer’s equity do not cover the full price.

This guide looks at vendor financing from the seller’s side: why it can pay off, how the loan is structured and which risks you need to manage. The buyer’s overall financing — equity, bank, EIFO and earn-out — is in financing a business acquisition.

Why offer vendor financing?

For many smaller businesses, the pool of buyers is limited by what they can borrow. Banks usually lend based on the business’s historical earnings and the buyer’s own finances, and they rarely lend the full price. A seller loan can close the gap between what the buyer has and the price you are asking.

• More potential buyers: Buyers with limited equity can take part too.
• A better price: It is often easier to negotiate a price you are happy with when the buyer does not have to finance it all on day one.
• A signal of confidence: Being willing to wait for part of the money shows the buyer and the bank that you believe in the business.
• Interest income: The part of the price left as a loan earns interest.
• Succession and employees: In sales to family or employees, vendor financing is often necessary. See business succession.

How a seller loan is typically structured

There is no standard. Terms are negotiated in each deal and depend on the business’s cash flow, the bank’s requirements and your trust in each other. These elements always need to be agreed:

Share and down payment

How much of the price will be a loan, and how much paid in cash? The larger the seller loan, the larger your risk. At a minimum, make sure the down payment covers your tax on the sale, because the tax often falls due before the loan is repaid.

Term and repayments

The term must fit the business’s cash flow so the buyer can pay the instalments out of profit without starving the operation. Repayments can be equal (a serial loan), rising or start after an interest-only period. A short term reduces your risk; a long one makes it easier for the buyer.

Interest

The interest rate should reflect the risk. A seller loan is often subordinated to the bank and has weaker security, so it is risky for the seller. Fixed or variable rate must be agreed, and in deals between related parties the terms must be at arm’s length, because the Danish Tax Agency may look at them.

Security

Security decides what you are left with if the buyer does not pay. The usual options are a charge over the sold shares or assets, a floating charge, retention of title until the loan is repaid, and a personal guarantee from the buyer. Which options are real depends on the form of the deal and on whether the bank already has a charge over the same assets.

Promissory note, charges and registration

The seller loan is documented in a promissory note or a separate loan agreement that refers to the purchase agreement. If the loan is to be secured, the security must be perfected to be effective against the buyer’s other creditors: a floating charge is registered in the Personal Register, charges over vehicles in the Vehicle Register, and a pledge of shares usually requires notice to the company. Retention of title must be agreed no later than the takeover and does not protect every type of asset — as a rule, for example, not goods intended for resale. Have your lawyer assess which security will actually hold in your deal.

Risks for the seller

The main risk is simple: if things go badly for the buyer, you may not get the rest of the money. And you no longer control the business that has to pay the instalments.

• Credit risk: The buyer may lose customers, lose money or go bankrupt. Assess the buyer as carefully as the buyer assesses the business.
• Subordination: If the bank requires the seller loan to rank behind it, the bank may have first claim on the cash flow and the security.
• Tax before payment: The whole gain is as a rule taxed in the year of sale, including the part paid later. See tax on the sale of a business.
• No influence: You cannot control the operation. Access to accounts and limits on dividends can give you early warning.
• An unclear agreement: Without clauses on default and acceleration, it can be hard to act when instalments are missed.

Risks and benefits for the buyer

For the buyer, a seller loan makes the deal possible with less equity, and the bank often sees it as a plus that the seller shares the risk. On the other hand, the instalments are a fixed cost that must be paid in bad years too. The buyer should check whether the business can carry both the bank’s and the seller’s instalments and a realistic salary for the owner.

Vendor financing or earn-out?

The two are often confused, but they solve different problems. A seller loan is a fixed amount repaid with interest; it is used when the buyer cannot finance the full price. An earn-out is a contingent part of the price paid only if the business reaches certain targets; it is used when you disagree about value. Many deals combine the two with a cash down payment.

Vendor financing on Sitavo

On Sitavo, vendor financing can be proposed from the listing and agreed in the deal. When you create the listing, you can show that you are open to payment in instalments and propose the down payment share, number of instalments, interval and interest rate. In the offer, the buyer can split the amount between cash, earn-out and vendor financing.

• Loan agreement in the deal: Once you agree on the price, you can create a loan agreement with a down payment of 5–90% of the price, 2–60 instalments monthly or quarterly, a fixed annual interest rate and a first due date. Instalments are calculated as a serial loan.
• Security: You can choose retention of title until the loan is repaid (to the extent it can lawfully be enforced) and name a debt collection agency to which the seller can pass a missed instalment.
• Acceptance and follow-up: Both accept the agreement electronically, and it is locked as a PDF. Instalments are tracked in an overview where the buyer records the payment and the seller confirms it.

Sitavo is not a party to the loan agreement and does not handle the payments; they go directly from buyer to seller. The agreement is not signed with MitID and has no enforcement clause. Have a lawyer review it, especially for large amounts and when the bank requires subordination. You can find a lawyer or accountant among Sitavo’s advisers, and you can work on the price in the valuation tool.

Before you say yes to a seller loan

• The down payment at least covers your tax on the sale
• The instalments can be paid from the business’s expected profit
• You have seen the buyer’s financing plan and the bank’s commitment
• Interest and term reflect the risk
• The security is described, and you know what the bank holds
• Subordination and default are agreed in writing
• You have a right to see the accounts until the loan is repaid
• A lawyer has reviewed the agreement, and an accountant has calculated the tax