An element of vendor financing is common in business sales. In other words, the vendor gives the purchaser a loan that is paid back over time. The loan is repaid in the same way as any other loan, with the revenues of the company normally being used to do so.
Seller financing reduces the buyer’s dependence on lender finance. Sellers might be more accommodating than lenders, offering a purchaser more favourable terms. Things are a little different from the seller’s viewpoint. Sellers may have to provide finance as an inducement to purchasers but tend to avoid it if they can because they like to get paid quickly. In many cases sellers will be required to finance between 20 -50% of the purchase price.
Buyers may also fund a portion of a business purchase by taking on some of the company’s existing obligations such as loans and trade commitments. But it must be remembered that some debts must be approved by the lender before being transferred. Taking over company debt can be a complicated process and have tax implications.