Vendor Loan

A vendor loan is a loan that the seller grants to the buyer for part of the purchase price. The buyer therefore does not pay this part immediately, but later to the seller. This helps close a financing gap and shows the seller's confidence in the deal.

A term of several years and an interest rate above bank terms are common, because the loan is subordinated to the financing banks. Interest is often not paid currently but accrued and settled at the end, so that free cash flow is first available to senior lenders. That subordination is both the reason for the higher return and the main risk: if the company runs into difficulty, the seller is paid only after the creditors that rank ahead under the agreement. The structure is widespread in succession situations and management buyouts, where the buyer's equity is limited and banks do not close the entire gap. For the seller it extends their own risk beyond completion, so security, information rights and provisions for a later onward sale should be agreed.

The timing of taxation on the deferred portion should also be examined. The ranking relative to the financing banks, usually recorded in a subordination agreement, the right to set off the buyer's warranty claims, and the consequences of an onward sale or change of control all need to be settled.

Note: This explanation is for general information only and does not constitute tax or legal advice. The tax and legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified tax adviser or lawyer.