A Guide to Protecting Yourself When Issuing Vendor Finance

At one point, you may consider selling your small business. Whether it may be to start anew, source out funding for a new project, or look for new people to take over a project, various reasons make selling viable. However, it can be challenging to sell an entire business, especially when it comes to niche or particular industries that don’t have a sizable following.

Small business owners have two ways to offload their hard work—cash and financing. Although cash is the most optimal choice because it’s a “quick exchange” and convenient transfer of documents, most small business sales result in financing.


Understanding Vendor Finance

Many banks that finance a purchase of small businesses have been putting up tighter lending conditions, especially for buyers who cannot provide collateral. When a buyer of a small business is unable to give a real estate (or any other asset of value) for security, a seller becomes obligated to provide a loan to the buyer. A seller-issue loan is commonly known as “vendor finance,” which is an option offered to defer a part of the purchase price to conduct a sale.

Every vendor financing loan becomes a part of the purchase price to the buyer, which, in turn, results in the seller getting a better price for their years of hard work. An essential factor to consider when issuing vendor finances, however, is that it is a risky option to go for at the end of the day. After all, if a bank wouldn’t provide them with the loan, why should you?


The challenge of issuing vendor finance

Should you find yourself in a tight spot that requires you to offload your small business right away, then you’re most likely going to have no other choice but to offer vendor finance. Fortunately, successful vendor finance experiences can be assured through one practice that every seller has to apply—protecting oneself when providing vendor finance.


How to protect yourself when issuing vendor financing

To ensure that your vendor finance process goes as smoothly as possible until the last payment, here are a few ways that you can protect yourself:


1. Assess the creditworthiness of your borrower

In the same way that banks deal with borrower applications, protecting yourself when issuing vendor finance will entail assessing the creditworthiness of a borrower in full detail. It is crucial to obtain any essential details of a buyer’s credit history, a summary of their assets and liabilities (which must be certified by an accountant), and details of any credit defaults. Assessing the creditworthiness of your buyer can provide you with insights on what the experience may be like, so make sure to conduct it as objectively as possible.


2. Add security interest to your contract

You can include security interest back over your small business and a buyer’s assets in case the buyer backs out. Should a buyer end up defaulting on their repayment of the vendor finance, then you can take the necessary steps to recapture 100 per cent of the business and resell it. When adding security interest, it is essential to consider the following factors:

  • In most cases, a buyer may have a legitimate reason that he is unable to make repayments but is still capable of paying at a much later date
  • The process of appointing a receiver to seize assets covered by security interest involves a significant amount of cost and delay in negotiations
  • A buyer, in some cases, may have borrowed from another financier who is subject to receiving proceeds from the sale of your small business and assets


3. Place a mortgage over a buyer’s real property

One of the most effective ways to assure your protection when issuing vendor finance is to obtain a duly registered mortgage over your buyer and their guarantor’s real properties. Getting a mortgage over a buyer’s property of equal value with your business is essential to protect your interests should the borrowing party fail to pay. When drafting the registered mortgage, ensure that you are the only mortgagee on file to protect yourself from any potential legal loopholes.


The Bottom Line

Most financial firms can consider issuing vendor finance as one of the riskiest options. If worst comes to worst, then the best thing you can do is to protect yourself. Follow the three tips above and have a highly successful vendor finance experience.

We are a legal firm in Milton, Queensland. If you’re looking for innovative solutions for your small business’s needs, get in touch with us today! We’ll be happy to help!