More and more buyers are turning to Vendors for finance instead of traditionally turning to eye-gouging time evaporating banks.
In fact, the time frame is one of the most common reasons a buyer will enquire “will you consider Vendor Finance”. Yesterday, a buyer reported to us that their bank would need 3 months from the time of their application to settlement.
3 MONTHS!!! - I nearly fell off my new ergonomic swivel chair (My Xmas present to myself – believe me it was long overdue).
Here are our tips for buyers looking to be successful in their Vendor Finance request:
1. Always (always, always), explain the reason WHY you are enquiring. Some buyers can have a tendency to go in guns blazing. Remember any business sale is a collaboration between you and the seller. Think of how you would approach the Seller if they were your business partner. Explain why you are interested in this solution, and how it could benefit them and the deal.
2. Pre-prepare how your Vendor Finance proposal could benefit the seller, which demonstrates your collaborative and commercial approach. Articulate to them aspects such as interest. I.E perhaps you may nominate a slightly more attractive interest rate than they would otherwise receive from a savings rate. This should still be lower than the rates your bank would have charged. You can also discuss with them, a reasonable time frame to repay the finance, what portion of the purchase price is under finance, the security or guarantee you will offer, or perhaps the purchase price is slightly higher as an incentive. The time frame is a big one – this will allow you to complete the deal much faster which is attractive to most sellers.
3. A Vendor Finance deed won’t come for free. It is the best practice that the buyer pays the fees for drafting the deed which put the seller’s mind at ease and you will pay this portion of the seller’s legal costs. In our experience, this fee is generally between two and four thousand. Ask the seller to confirm the fee their solicitor will charge so there are no surprises later.
Remember, it is difficult for a buyer to raise funding where there is both bank and vendor finance. Banks don’t like knowing you have an obligation to pay anyone else back but them. Who would have thought they don’t like you playing the field?
I didn’t say impossible, however, there needs to be some creativity in the contract, and a willingness for you to bring your disclosure obligations right up to the line of ethical and compliant with the bank's disclosure policy.
We recommend Vendor finance of 50% LVR or less as the threshold. Anything higher, and you may want to question whether or not the business is the right fit for you, as you will simply be too leveraged.
Overall Vendor Finance, can be an excellent option, as generally, the payment terms are faster, meaning you are getting out of debt faster and can enjoy the profit proceeds earlier. Don’t be afraid of some short-term pain, to get this paid off quickly.
For assistance in negotiating a Vendor Finance structure that benefits you and the seller, contact our team for a confidential discussion.
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