What is a Vendor Finance Agreement?

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What is a Vendor Finance Agreement?

January 28, 2021         Jethro Fox

Under a Vendor Finance Agreement, the Vendor, also known as the Seller, agrees to fund some of the purchase price to sell their own product. 

This means that the seller will provide the buyer with capital, which the buyer will then use to purchase the goods or services that the seller wishes to sell. The buyer will pay an initial sum upon settlement, with the remaining balance plus interest, being repaid over a length of time agreed by both parties. 

For example, a business is advertised for a purchase price of $1,000,000. The purchaser pays $650,000 at the date of settlement, as well as the remaining $350,000 over 3 years at 5% interest. This is guaranteed by the buyer, against a mortgage and the assets of their business. . 

Why Use a Vendor Finance Agreement

Buyer: 

From the perspective of the buyer, a vendor finance agreement allows an individual to purchase a business or a property in a circumstance when they do not have the full availability of finances required. This provides an opportunity for buyers to get into the market or acquire a business at shorter notice. 

If for example, a prospective buyer is struggling to get a loan from a bank to finance a purchase, then a vendor finance agreement may be a desirable method of acquiring the needed finances. 

Seller:

From the seller’s perspective, a vendor finance agreement may result in a quicker sale, or if they believe their business is more highly valued than what traditional lending institutions believe.

What Should be Included in the Agreement? 

The vendor finance agreement should clearly outline the specifics of the arrangement. The following terms are commonly included in a vendor finance agreement:

  • The parties to the agreement;
  • The exact amount being borrowed;
  • The interest rate of the agreement;
  • How often the repayments must be made;
  • The length of the arrangement;
  • How the loan will be protected;
  • The form of the loans; e.g. is it an interest only loan? 

Ensuring that you have a lawyer both draft and review your vendor finance agreement, will give you the best chances of a positive outcome. 

From a seller’s perspective, they need to ensure that there is adequate security provided on behalf of the buyer. The security refers to what the purchaser is guaranteeing the loan with in case of the event of a default in repayment from the buyer. The most common forms of security include:

  • A mortgage over certain assets;
  • A mortgage over the lease owned by the buyer;
  • A charge over the buyer’s assets.

What are the Risks Involved? 

Like with any loan, there is a risk of default. In a vendor finance agreement, this would commonly be the buyer not making the required repayments under the agreement. 

From the perspective of a buyer, a vendor finance agreement can be overly complex, and as such they might not be certain about what they are actually agreeing to. Thus, ensuring you have adequate legal representation on the issue will help minimise risks. Due to the complex nature of the agreements, the buyer may end up having to pay a price that is far higher than the actual value of the property or business. Furthermore, there can be uncertainty about who actually owns the property, which may result in unclear rights for both parties. 

Having a properly drafted contract, which has been reviewed by a lawyer will help minimise the risks involved. 

To Sum Up

A vendor finance agreement offers an alternative mechanism to obtain finance and to purchase or sell property or a business. These forms of agreements can be positive for both buyers and sellers, yet they do not come without risks. Ensuring you have all agreements reviewed by a lawyer will help ensure you have the best chances of success with the arrangement.

If you wish to speak with one of our lawyers on this topic, feel free to contact OpenLegal at 1300 337 997.

About Jethro Fox

Jethro is a paralegal. His main legal interests are with Intellectual Property, Technology and Innovation, as well as areas of Corporate Law. He is in his final year of a Bachelor of Laws/Bachelor of Economics double degree at the UTS.