Definition
Vendor finance (also called seller financing) is when the business seller agrees to receive part of the purchase price over time rather than all upfront. This is commonly used when bank financing alone is insufficient, or when the seller wants to demonstrate confidence in the business's future earnings. The vendor note is typically subordinated to any bank debt and carries a higher interest rate.
Worked Example
A buyer purchases a $600,000 business with $300,000 from a bank and $150,000 vendor note from the seller (repaid over 3 years at 6%), contributing $150,000 equity. This structure gives the buyer 25% equity at close.
Related Terms
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