Vendor finance is an arrangement where you, the seller, lend the buyer part of the purchase price — effectively becoming their bank. Instead of the buyer funding 100% of the deal through a bank or their own cash, they pay you a deposit at settlement and repay the balance in agreed instalments, with interest, over an agreed term. In Australia, vendor finance features in SME transactions from $300,000 up to $5 million, most commonly where the buyer can’t secure full bank financing for the goodwill component of the business.
What Is Vendor Finance?
When a buyer approaches a bank to fund a business purchase, the bank tends to treat the application with a fair amount of scepticism. Business goodwill — which is typically the largest single component of any SME sale price — doesn’t show up on a balance sheet. You can’t repossess it. Banks will generally only lend against tangible assets: plant, equipment, commercial property. If you’re selling a services business, a professional practice, or anything where the value sits primarily in relationships and recurring revenue, a buyer may struggle to get a bank loan for more than 40-50% of the purchase price.
That’s the gap vendor finance is designed to fill. You agree to fund part of the shortfall — typically 20-30% of the deal — and the buyer repays you over two to five years at an agreed interest rate, usually somewhere between 6% and 10% per annum.
In practice, a $2 million business sale might look like this: the buyer puts in $1.3 million at settlement — partly from personal funds, partly from a bank — and you carry a $700,000 vendor loan repayable over three years at 8% interest. You receive monthly payments of principal plus interest, so the total you eventually collect exceeds the original $700,000. You’ve effectively been paid a premium for taking the repayment risk.
Why Sellers Agree to It
The most common reason is simple: the deal doesn’t happen otherwise.
If your buyer can fund 70-80% of the purchase price through a bank but can’t bridge the remaining 20-30%, your choices are vendor finance, reduce the price, or find a different buyer. For sellers who’ve done their homework on the buyer and like what they see, vendor finance is often the most commercially sensible path.
There’s also a subtler reason. Offering modest vendor terms — say 20% of the deal — signals to the buyer that you believe in the business. You’re not taking all the money and running; you’re leaving some skin in the game. Many sophisticated buyers actually want to see this. It tells them the seller is confident the business will keep generating what’s needed to make the repayments (which requires it to keep performing, which is what the buyer wants reassurance on in the first place).
One rule of thumb worth knowing: vendor finance above 30% of the purchase price should prompt some hard questions. If you’re being asked to fund more than a third of your own sale, it’s worth asking whether the business — not the buyer — is the problem.
The Risks — And They’re Real
This is the part most sellers skim when they’re excited about getting a deal across the line.
A business broker I know in Perth told me about a transaction in Osborne Park where the seller agreed to vendor finance $600,000 of a $1.8 million deal. The buyer seemed solid — experienced operator, relevant background, clear plan for the business. Six months after settlement, the buyer had stopped returning calls. By the 18-month mark, the business was effectively wound down. The seller had a security agreement (which is more than some sellers bother to get), but the assets it was registered over had been sold off or written down to near-zero. Enforcing the security was expensive, slow, and ultimately yielded about $80,000. The seller took a $520,000 loss on a deal they thought was settled.
The risk is structural. When you provide vendor finance, you are a creditor — often a partially secured one — of the buyer. If the business fails after you hand over the keys, you’re in line behind the ATO, the bank, employees with unpaid entitlements, and any landlord holding a bond. Your security agreement is only as good as the assets it’s registered over and your willingness to enforce it.
Go into vendor finance with clear eyes about this. It is not a formality.
How to Structure Vendor Finance Properly
If you’re going to offer vendor finance, you need to set it up like a lender — because that’s what you are.
Loan agreement. Have a commercial lawyer draft a proper vendor finance agreement. It needs to set out the principal, interest rate, repayment schedule, what constitutes default, and what happens on default. Don’t rely on clauses buried in the business sale agreement; it needs to be a standalone document.
Personal guarantee. If the buyer is purchasing through a company, require a personal guarantee from each director. This lets you pursue them personally if the company can’t pay. Without it, you’re lending to a shell.
PPSR registration. Register your security interest on the Personal Property Securities Register (PPSR). This is Australia’s national register for security interests in personal property — basically, everything that isn’t land. A registered interest gives you priority over unsecured creditors if the buyer defaults and assets need to be realised.
Real property mortgage. If the buyer owns real estate, a second mortgage as additional security is worth exploring in larger transactions. It’s more protective than a PPSR registration over business assets, which can depreciate or disappear.
Interest rate. Set it at commercial rates — 6% to 10% for vendor finance in Australian SME deals is standard. Zero-interest vendor finance usually signals a discounted sale price and creates its own tax complications around deemed interest.
Term. Two to five years is typical. Beyond five years, too much can change; under 18 months, repayment pressure can push buyers towards cutting corners to find the cash.
Vendor Finance vs. Earn-Out: What’s the Difference?
These two structures get conflated constantly. The distinction matters.
An earn-out ties a deferred portion of the sale price to future business performance. You only get paid if the business hits agreed targets — revenue, EBITDA, retention rates. It’s contingent on outcomes. If the business underperforms, the earn-out amount is reduced or disappears.
Vendor finance is a loan. You’ve both agreed what the business is worth; the buyer just doesn’t have all the cash right now. There’s no performance condition. They owe you the money unconditionally, regardless of whether the business performs brilliantly or struggles. This makes vendor finance structurally safer for sellers than earn-outs — provided, and this is the critical caveat, the security arrangements are properly documented and enforced.
The two structures can also be combined: an earn-out for the genuinely uncertain component of value, vendor finance for a portion the buyer simply needs time to fund.
Tax Implications — Read This Before You Agree
The tax treatment of vendor finance trips people up regularly.
Capital Gains Tax is generally triggered at settlement — the date you exchange contracts and the buyer takes control of the business. Not when you receive the last payment. Not when the vendor loan is fully repaid. At settlement.
That means you could face a CGT bill in the same financial year as the sale, calculated on the full sale price, before you’ve collected all the money. If $700,000 of your purchase price is on vendor finance terms over three years, you may owe CGT on that $700,000 in year one. The cash arrives in years one through three; the tax bill arrives immediately.
This is worth modelling carefully with your accountant before you agree to any structure. The small business CGT concessions — particularly the 15-year exemption and the retirement exemption — may significantly reduce or eliminate your CGT liability, but your eligibility needs to be confirmed, and the deal structure can affect it.
When Vendor Finance Makes Sense (and When It Doesn’t)
Vendor finance works well when:
- You’re selling to a buyer with solid credentials but limited bank access — common in the sub-$2 million market where bank appetite for goodwill-heavy businesses is thin
- The business doesn’t depend heavily on your personal involvement post-sale (a business that collapses without you is a bad security asset)
- Your security arrangements are genuinely robust — PPSR registration, personal guarantees, ideally backed by real property
- The vendor finance portion sits at 20-30% of the deal, not more
- You can live with the repayment timeline and don’t need immediate access to all the proceeds
It’s the wrong move when:
- You need all the proceeds at settlement to pay down a mortgage, fund retirement, or relocate
- The buyer is already highly leveraged and has limited personal assets behind the guarantee
- You’ll be handing over a people-dependent business that could fall apart without the right operator in the seat
- You’re being asked to fund 40% or more of the deal — at that level of exposure, the risk profile starts to look less like vendor finance and more like a lease arrangement
The starting point for any of these conversations should be a realistic picture of what your business is worth. Use our valuation calculator to get a sense of the range before you start talking deal structures with buyers.
Getting the Right Advice
Vendor finance sounds simple — “you lend them some money” — but the documentation and tax complexity tends to outpace that summary pretty quickly. The structure matters. The security arrangements matter. The CGT timing matters. Getting any of these wrong can cost you significantly more than whatever it would have cost to do it properly the first time.
If you’re considering vendor finance as part of a deal, bring in a commercial lawyer for the loan agreement, a tax adviser to model the CGT impact across settlement and the repayment period, and an advisor who knows the business sale market to assess whether the terms are commercially reasonable.
If you’d like to talk through whether vendor finance makes sense for your situation, get in touch.