Home – New Forums Money matters Does Vendor Finance exist in Small Business?

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  • #968930
    Scratch
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    Hi all, I have a query in regards to whether anyone has ever had a helping hand extended to them or if there are business owners out there who would consider this.

    In property if I wanted to purchase a property but I cannot source finance from conventional means, ie A Bank, there is a vendor finance option available where I borrow the money from the vendor and make the loan repayments to the vendor.
    Curious, does a similar contract exist in business?

    I am a small time Real Estate agent just starting up and I have found an agency for sale. I am guessing at this early stage that I won’t get conventional finance for the purchase. Was wondering if the vendor would enter into a contract where I make regular repayments over a period of time rather than paying a lump sum.

    Has anyone out there ever had an experience like this or am I simply dreaming?

    cheers

    Shane Scott
    Scratch Property
    http://www.scratch.net.au

    #1035919
    Warren Cottis
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    Hey Scratch

    There is no such thing as dreaming in negotiation.

    However, it does come down to how “hot” is the deal from the buyer’s perspective… if it’s not then it turns to what incentives are needed to consummate the deal

    A house in Sydney’s eastern suburbs with ocean views for $400k will not need any support usually unless it includes a cow with diapers that has to be looked after

    #1035920
    yourvirtualboard
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    Hi Scratch,

    Many successful empires started as a dream, so don’t give that up!

    To answer your question – yes it’s possible but the only person that can confirm in this case is the owners of the agency you are keen on.

    Set up an appointment and ask the question directly, you may be presently surprised. If they have just listed then I think chances would be lower but if on the market for some time, who knows?

    One thing is for sure if you don’t ask then the answer is a definite no.

    #1035921
    abacus
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    Yes vendor finance does exist for small business. There are certainly points for and against it. I and a few of my friends have bought some or all of their businesses with vendor finance. (hehehe we were all so young and eager to be in retail :D )

    For:

    If the vendor is willing to offer finance it usually (but not always) means that the business is fairly solid and the books are true. In other words the vendor believes the business is capable of paying him back his loan.

    SOMETIMES… a willingness of a vendor to offer finace can tip the bank into lending after a short time. (I had a friend who bought a florist shop totally vendor finance because Westpac wouldn’t look at her, lo and behold less than 6 months later they offered her a loan at a rate lower than she was paying the vendor …Win Win vendor got the $$$ earlier and my friend got a cheaper loan and eventually paid it ou earlier)

    Against:

    Because the vendor has a claim over the business they keep “sticking their nose in ” Banks don’t tend to care as long as you are paying the bills

    Vendor finance is usually at a higher rate and with a few more conditions.

    Good Luck

    #1035922
    Scratch
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    Thanks very much guys for the advice, I am definitely not going to give up thats for sure. I guess my frustration comes from trying to achieve so much so quickly and having to watch opportunities slip by. A mentor of mine once said that the bargain of the century comes along once a week, in respect to property I believe him, I’m just not so sure it applies here.

    From here I will apply by conventional means and if that fails then I will definitely go to the vendor direct and see what he thinks. I had a long chat on the phone with him the other day and he seems a very genuine guy with the same ideals in property as me. So maybe if we are on the same wavelength with what we are both trying to achieve in property then I might be a slight chance of him giving me this opportunity.

    cheers

    Shane

    #1035923
    James Millar
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    I tend to agree with the views posted here – you never know unless you ask and on the rare occasion the most unexpected and unlikely result can go your way. That being said, in all reality you will likely need some “skin in the game”. It’s simply an issue of risk transfer.

    With vendor financing you are essentially asking for an unsecured loan with no upside but all downside to the the vendor. You can use special securities to provide upside (capital appreciation rights and options) to the vendor and to be honest that’s the only way we would endorse a vendor taking such a position. For example – buy what you can pay for now and take a buyout option over the residual equity at a future value (with a prescribed method). The vendor takes a right to claw back all of their shares if you default etc.

    Sometimes you only get one bite at the apple so if your going to ask for something unique in your favor (such as substantial vendor financing) then be sure to offer something in return. Proper deal structure in the initial proposal can make the difference between being dismissed completely versus being regarded as a serious buyer. Good luck and have a go!

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1035924
    Scratch
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    Really helpful post James, thank you very much. I am currently looking at drawing upon every little bit of equity I have in my property portfolio for a deposit for the business, hopefully that may help me get my foot in the door. The vendor did say to me that he was very very negotiable so like you say, you never know, sometimes things do go your way.

    thanks again

    Shane

    #1035925
    Sean@dominiumcapital
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    Shane, you may also want to ask a business owner if they are prepared to “transition” out of the business. You can structure a deal around the owner staying on for awhile (somewhat negating the downside risk to him, as he can continue to get paid); you will be the new owner, but they can stay on, almost as a strategic adviser to you. There can be upside for the old owner; you can insert clauses into your deal around setting hurdle rates against milestones and the like. There’s plenty of ways to structure something like this. You may nominally “pay more” for this – but, in reality, you’re not. It’s not “more” if you can’t get the money anywhere else (bearing in mind, of course, that you still need the deal to be commercially viable for you).
    Also – don’t underestimate the value of the previous owner’s knowledge. If the vendor is happy to look at staying on, you can be pretty well assured that they are genuine sellers and have a solid business.

    All the best with it!

    Sean Dunne
    Dominium Capital
    http://www.dominiumcapital.com.au

    #1035927
    nannorma
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    Nobody seems to ask the question: What happens if the buyer defaults. This what happened in my family. The business collapsed owing money and was put into administration. Four years later the buyer is still struggling to repay the vendore. The whole deal has been a huge catastrophe.

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