How To Deal With Your Buyer Being Short Of Money

First things first – what is vendor funding you ask?  

These days finance is very tight, banks are difficult to deal with and you don’t want to lose a deal because the bank won't give your buyer the money.  That’s where vendor funding comes into play.

When it comes to buying a business a buyer will need to think carefully about how they plan on raising the necessary finance. A small minority may be in a strong financial position, even having access to cash, unfortunately this is rare, most, will need to raise funds from a third party. That’s when they turn to a bank for help.

After the royal commission banks are becoming increasingly difficult to deal with, they require a significant amount of information to assess an application, candidates need to have a squeaky clean credit history and it takes a long time to achieve approval. Then after all that, the chances of an application being declined is still very high.

Some buyers may be disadvantaged in approaching a bank, they may either be self employed, currently have poor cash flow or may have an insufficient credit history.

If a buyer doesn’t have any luck with a bank, they may look to renegotiate the deal with the business owner, or even walk away.

Rather than risk a buyer walking away, it is becoming increasingly common for the vendor to leave some money on the table as part of the negotiation. Are you ready to provide vendor funding ? 

First things first – what is vendor funding you ask?  

Vendor funding or Vendor finance occurs when a seller agrees to fund the purchase price (usually a part of, usually no more than 20% of the purchase price) to sell their business. An initial amount will be paid by the buyer at settlement, with the balance, plus interest, repaid over an agreed period.

Vendor finance has a number of advantages which include: The vendor increases their sale price. The vendor earns interest on the loan which is usually higher than that available from other financial institutions.

Vendor funding has become increasing popular in Australia in recent years. In the USA the majority of business sales have a vendor funding component. So it is expected this trend will continue.

It’s not an ideal situation for a business owner. Sometimes a professional business broker can help you avoid this by diligently screening your enquirers early on – particularly if there is demand for the business. Selecting the right purchaser from a funding perspective is critical. That’s if you have options.

If however you do not have an abundance of buyers and you need to do a deal you may have no other option but to extend or consider vendor financing.

Most buyers and sellers talk about vendor funding but they don’t really understand how it works.  Careful consideration needs to be given to how the arrangement is set up, negotiated, and documented so that should things go wrong you have some protection. A legal professional should be engaged to review the vendor funding agreement and ensure all paperwork is in order to allow the business sale to occur.

At the end of the day, if you need to get a deal across the line with a buyer that is short on funding there are other options, but you will need an experienced business broker to give you assistance.

When it comes to vendor funding you need an Advantage, so call us today.