Vendor Finance – Buy Without A Bank

What is it and why use it?

If you want to buy real estate or a business and you cannot get a loan for the full amount through a bank, you would approach the vendor to finance part or all of the purchaser.

So long as the vendor doesn’t have a mortgage, vendor finance can offer the flexibility you need as a purchaser to negotiate a loan that suits you. It is often a better investment for a vendor than putting money in the bank or in shares at the moment, depending on the interest rate that you will pay.

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The most typical vendor finance arrangements are:

  1. Instalment Sales – where the vendor is like the bank and you pay the purchase price to the vendor over a negotiated term by way of instalments of principal and interest, or interest only with a balloon payment at the end; or
  2. Rent to Own – this arrangement is more like an Option to Buy. You would begin renting with an option to buy within a particular period for a particular price, and you wouldn’t have to proceed if you decided the property wasn’t for you.

Is vendor finance legal?

Yes – there are frameworks in all Australian States for it.

It can be like a bank mortgage, with similar paperwork. Or the vendor can hold the Title and the Transfer as security until the final payment is made.

Is vendor finance new?

No – it’s not new, and it comes and goes in popularity. Usually, when the banks’ conditions tighten up and they are rationing their lending, vendor finance popularity goes up. It is also more popular when there are lots of properties on the market that are not selling, because it may be the only way a vendor can get an agreement.

Vendor finance for buying a business

Financing the purchase of a small business with a bank loan is often even more difficult than buying real estate, because the bank will want to see that you already have capital and will probably want a personal guarantee over your personal assets as well. Asking the vendor for vendor finance can not only overcome any difficulty in raising capital, but it also ensures that the vendor has an interest in the success of your new business. They are not going to sell you a dud, because they want to make sure they get their money, and they are also going to encourage their former customers to keep coming to you because they have a vested interest in your success.

What we can do – Let us help

TBA Law often acts for vendors selling under vendor finance terms, and can help you to structure the arrangement so that your interests are secured.

If you are purchasing, we have the experience to help you negotiate vendor finance terms, and can give you the advice you need on the various options to structure any vendor finance agreement.