Vendor financing: how the seller funds part of the acquisition price
Vendor financing (also called a seller loan or vendor loan note) is increasingly used in small-cap M&A deals in France. The seller funds part of the price themselves: the buyer pays a first instalment at completion, then repays the balance in instalments, with interest.
It is a powerful lever to close the funding gap when the bank will not cover everything, and a strong signal: a seller who agrees to be paid later shows confidence in the soundness of the target. This guide explains how vendor financing works, the repayment schedule, the security you need, the tax treatment and the pitfalls to avoid.
What is vendor financing?
Vendor financing is the deferred payment of part of the sale price. Rather than requiring 100% of the price at completion, the seller receives part of it straight away and agrees to spread the rest over two to three years. The seller therefore partly acts as a lender, alongside bank debt and, where relevant, an LBO structure.
Result: the seller receives EUR 1,400k at signing and EUR 600k over 3 years through regular instalments.
How vendor financing is repaid
The balance funded by the seller is repaid according to a negotiated repayment schedule, usually annual, made up of a capital portion and interest calculated on the outstanding capital.
Term, interest rate and amount
Vendor financing often represents 10% to 30% of the price, over one to three years. The interest rate is freely negotiated between the parties; it must remain consistent with market rates to avoid any recharacterisation. Vendor financing can be combined with an earn-out, but the two mechanisms serve different purposes: one is a fixed debt, the other a contingent additional payment.
| Interest rate range | Typical situation |
|---|---|
| 1.5% – 3.5% | Strong confidence in the project, robust buyer |
| 3.5% – 5.5% | Common standard (market rate) |
| 5.5% – 8% | High risk, challenged deal or volatile sector (premium rate) |
Benefits of vendor financing for the seller and the buyer
Well structured, vendor financing is a win-win arrangement: it widens the pool of potential buyers for the seller and reduces the buyer’s funding requirement.
Benefits for the seller
- Stronger negotiating position — By showing confidence, the seller can ask for a higher price or negotiate better terms on other points (earn-out, non-compete clauses, etc.).
- A wider pool of buyers — Some solid buyers without large equity can qualify for the acquisition.
- Additional income — The interest rate generates an additional income stream over several years.
- Potential tax spreading — Depending on the structure, spreading the payment may bring tax advantages (to be reviewed with a tax adviser).
- A signal of confidence — Reassuring for the buyer’s bank and for the other stakeholders.
Benefits for the buyer
- Less personal equity required — The portion funded by the seller does not have to come from the buyer’s own pocket or from additional investors.
- Greater borrowing capacity — Banks are more willing to lend when the seller agrees to fund a significant share.
- Often a competitive rate — Usually one or two points above senior debt, but sometimes below the alternatives (mezzanine, equity).
- Lower structuring costs — Fewer parties and leaner documentation than mezzanine or a complex LBO.
- Flexibility and negotiation — Every term (duration, rate, security, schedule) is negotiated face to face.
A decisive signal of confidence
By agreeing to be paid later, the seller sends a positive signal to the banks and to the buyer: they believe the business will last. This signal can unlock bank financing and sometimes justify a slightly higher price.
Drawbacks and risks for the seller
- Exposure to default risk — The buyer may run into operational or financial difficulties and be unable to repay.
- Lower effective price — The interest often does not offset a fall in activity or a deterioration of the target.
- Subordination — In the event of default, the seller ranks behind the bank lenders.
- Administrative burden — Monitoring, collection, reminders and potential litigation.
Drawbacks and risks for the buyer
- Additional repayment burden — An obligation that weighs on operating cash flow after the acquisition.
- Early repayment penalties — Many agreements include restrictive clauses if the buyer wants to deleverage too early.
All in all, the drawbacks for the buyer are limited: broadly the same as, or fewer than, those of bank financing.
Securing repayment: security for vendor financing
The main risk of vendor financing is non-payment. The seller should therefore require robust security; without it, they are exposed to a default by the buyer.
To secure the transaction, the seller may request:
A pledge over the shares sold
Security over assets
A personal guarantee, etc.
Ranking alongside senior lenders
When the buyer also borrows from a bank, vendor financing is generally subordinated to the senior debt. An intercreditor agreement sets the order of repayment and protects the seller’s rights.
Tax treatment of interest and capital gains
Interest received is taxable in the hands of the seller; under French rules, payment of the price in instalments may, subject to conditions, allow the capital gains tax to be spread over time.
Conclusion: when vendor financing makes sense
In short, vendor financing strongly benefits the buyer. It is commonly used to widen the pool of potential buyers and make their financing easier, particularly for individual buyers (search funders and owner-managers buying in).
In return for the default risk and the deferred payment, it allows the seller to negotiate a higher price.
If the seller wants to make the buyer’s financing easier without being penalised, they can work with an adviser to prepare staple financing.
Vendor financing: frequently asked questions
What is vendor financing?
It is the deferred payment of part of the sale price: the seller receives part of the price at completion and agrees to spread the rest over two to three years, with interest, thereby partly acting as a lender.
What share of the price, what term and what interest rate?
Vendor financing often represents 10% to 30% of the price, over one to three years. The rate is freely negotiated: low to moderate (1.5–3.5%), market (3.5–5.5%) or premium (5.5–8%) depending on the risk, and must remain consistent with the market.
How can repayment be secured?
By requiring robust security: a pledge over the shares sold, security over assets, a personal guarantee, etc. When the buyer also borrows from a bank, vendor financing is generally subordinated to the senior debt through an intercreditor agreement.
How is vendor financing taxed?
Interest received is taxable in the hands of the seller, and payment of the price in instalments may, subject to conditions, allow the capital gains tax to be spread over time (to be confirmed with a tax adviser).
Structure your vendor financing
Repayment schedule, interest rate, security, subordination, staple financing: Collaboration Capital secures the structure of your sale or acquisition, from the financing plan to completion.
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