Vendor finance is where a business seller agrees to fund part of the purchase price themselves — accepting a portion of their proceeds over time rather than on settlement day. In Australia, vendor finance typically covers 20–40% of the business sale price, with the buyer paying the rest upfront from their own funds or a bank. It’s used across trades businesses, professional practices, and service companies when a buyer can secure some but not all of the deal through a lender.
What Is Vendor Finance?
When you sell your business with vendor finance in place, the sale proceeds split into two streams. The first — usually 60–80% of the agreed price — comes from the buyer’s own funds or a commercial lender on settlement day. The second portion sits on a promissory note or loan agreement: the buyer repays you over time, with interest, just like a bank loan.
You’re not gifting them money. You’re extending credit, secured against the business or other agreed assets. The buyer gets access to a business they might not have been able to fully finance otherwise. You get paid — eventually — often at a price higher than what a cash-only buyer would have offered.
Most vendor finance agreements in Australian SME sales run for two to five years, at interest rates between 8% and 12% per annum. A rule of thumb: if you wouldn’t lend to this buyer at your bank’s standard variable rate, don’t lend to them as a vendor finance seller either.
Why Sellers Offer Vendor Finance
The main reason is price. A buyer who can’t quite reach your asking price through conventional finance may happily pay a 10–15% premium if you’ll carry part of the loan yourself. You get the number you wanted; they get a business they otherwise couldn’t buy. That’s a genuine trade.
The second reason is buyer pool. Many businesses — particularly those where value sits mostly in goodwill rather than hard assets — are difficult to finance through traditional lenders. Banks don’t like lending against intangible assets. If your business falls into that category — a professional services firm, a trades business with long-standing client relationships, a recruitment agency — restricting yourself to buyers who can pay 100% upfront shrinks your options considerably.
The third reason is less discussed but real: vendor finance signals something to the market. A seller prepared to leave money on the table contingent on the buyer keeping the business running sends a different message than one who takes all the cash and disappears. It builds buyer confidence and can accelerate negotiations that might otherwise stall on price.
When It Makes Sense
The best vendor finance situations share a few characteristics: the buyer is qualified and capable, the business generates reliable cash flow, and the seller doesn’t urgently need the full proceeds on day one.
I spoke with an accountant last year who’d sold her practice — $2.2 million purchase price — with 30% funded by vendor finance over three years. She was semi-retiring and earning consulting income alongside, so she didn’t need the full cash immediately. The vendor finance let her achieve a price she wouldn’t have got from the shallow pool of cash buyers, and the repayments gave her steady income through the transition. She ran an independent credit check on the buyer (which is more than most sellers do), the practice had recurring fee revenue, and she held a first-ranking charge over the goodwill. It worked cleanly.
Management buyouts are another natural fit. A trusted management team buying out a departing owner frequently can’t raise 100% of the price through a bank — particularly if much of the business value sits in relationships they’re already carrying. If you’re selling to people who know the business inside out and have proved themselves over years, vendor finance is a reasonable bridge.
When It Doesn’t
Vendor finance is not appropriate when you need all the money now. That sounds obvious, but a surprising number of sellers don’t think carefully about their post-settlement cash needs — retirement costs, new ventures, tax obligations — until after they’ve agreed to defer a third of the sale price.
It’s also not appropriate when the buyer’s creditworthiness is unclear. If a buyer can’t get bank finance at all — not just partial bank finance — that should give you pause. Banks decline lending for reasons they don’t always share, but those reasons exist. If a lender who does this professionally has said no, understand why before you volunteer to fill the gap.
Businesses with volatile or owner-dependent earnings are a higher risk. If your EBITDA swings 40% year to year, or if the business has historically run on the back of your personal client relationships, the buyer is making vendor finance repayments while working against a fundamental uncertainty. Consistent repayment requires consistent cash flow, and consistency isn’t guaranteed when the person who built the relationships has just left.
Typical Terms in Australian SME Deals
Most vendor finance arrangements cover 20–40% of the total deal value, run for two to five years, and charge interest at 8–12% per annum. The interest rate should reflect your opportunity cost — what you’d earn if you received the full settlement amount and deployed it elsewhere.
Repayments can be structured as monthly, quarterly, or annual instalments. Some deals defer all principal repayment to the end of the term — a balloon structure — which maximises the buyer’s cash flow in the early years but concentrates your credit risk at the back end. Most advisors recommend regular principal-and-interest repayments; balloon structures make sense only if you have very high confidence in the buyer’s position at year five.
The vendor finance portion should always be documented in a formal loan agreement, separate from the business sale contract. That agreement needs to cover: interest rate, repayment schedule, security, default provisions, and what happens if the business is on-sold before the loan is repaid. A verbal understanding isn’t enforceable — and the moment something goes wrong, you’ll wish you’d documented everything.
Tax Treatment of Vendor Finance in Australia
This is where many sellers get confused. The capital portion of each vendor finance repayment is treated as capital proceeds from the original business sale — not as ongoing income. The interest component is different: that’s assessable income in the year you receive it.
What this means in practice: you’re not crystallising your entire CGT liability on settlement day. You’re spreading it across the repayment period as each principal payment arrives. In some structures this creates timing benefits; in others it’s neutral. Either way, your tax adviser needs to model this specifically for your deal — the structure of the loan agreement directly affects how the ATO characterises the payments.
For most Australian SME owners, the critical question is whether the small business CGT concessions apply. They can — but they apply based on the original sale event, not on each individual repayment. Get your accountant to work through this before you sign, not after. For a broader picture of how sale proceeds are taxed, see our guide on tax on selling a business in Australia.
What Happens if the Buyer Defaults
Default is the scenario every vendor finance seller should think through before they sign anything. If the buyer stops making payments — or the business starts failing and the cash flow dries up — your recourse depends almost entirely on what security you took at the time of sale.
Unsecured vendor finance is not vendor finance; it’s a donation with a longer payment schedule. (I’ve seen deals structured this way, generally because neither party wanted to spend the legal fees to document it properly, and they rarely end well for the seller.) At minimum, you should hold a first-ranking charge over the business goodwill, registered on the PPSR — the Personal Property Securities Register. A personal guarantee from the buyer is worth adding as a second layer.
Even with proper security, enforcement is not simple. Recovering a failed business is slow, expensive, and emotionally draining — particularly if you spent fifteen years building it and now have to watch a court process pick over the pieces. A charge over goodwill gives you options, but the goodwill by that point may be worth considerably less than when you sold.
The practical lesson: only extend vendor finance to buyers you’ve done real diligence on. Review their personal financials. Run a credit check. Understand what other debts they’re carrying before you become one of them.
For a checklist of what due diligence looks like from the buyer’s side — and therefore what you should be running on them — see our due diligence checklist for selling a business.
How to Protect Yourself
A few structural points that matter more than most sellers realise:
Register your security. Lodge your charge on the PPSR before or on settlement day, not after. Priority goes to whoever registers first; don’t leave yourself exposed.
Get a personal guarantee. If the buyer is acquiring through a company — which is typical — the guarantee from the individual directors means you’re not limited to the company’s assets if things go wrong.
Require financial reporting. Build monthly or quarterly management account reporting into the loan agreement. You need to see the numbers before a problem becomes a crisis, not after.
Restrict on-sale. Include a clause requiring your written consent before the buyer can sell the business, and triggering immediate repayment of the vendor finance balance if they do. You don’t want to discover your loan is now owed by a stranger who bought the business for a dollar.
Charge a real interest rate. If you offer vendor finance at below-market rates, you’re subsidising the buyer twice — once with the loan itself, once with the rate. You’re taking genuine credit risk; charge accordingly.
If the deal also includes an earn-out component alongside vendor finance, keep the two instruments clearly separated — they sit on different legal documents and create different obligations. For how earn-outs work as a standalone structure, see our guide on earn-out agreements when selling a business in Australia.
Vendor finance is a useful deal tool — not a last resort for sellers who can’t find buyers. Used properly, with qualified buyers, documented terms, and proper security in place, it can close a deal that wouldn’t otherwise happen at a price you wouldn’t otherwise achieve.
If you’re trying to work out whether vendor finance makes sense for your business sale, talk to us — or use our business valuation calculator to get a sense of what your business is worth before you decide how to structure a deal.