A client recently told me she had learned about vendor financing in a business seminar. One of those seminars was spruiked by slogans such as ‘build a business empire with no money down’.In my experience vendor finance almost always backfires. Here’s why.
Purchasers often ask for vendor finance because they do not have sufficient funds to cover the full purchase price of a business. That right there is a red flag.
Vendor finance is substantial risk for the vendor. They are selling their business to someone who cannot afford to buy it. Their loan is usually not sufficiently secured. The person they sell their business to does a bad job of running it and goes out of business, then into liquidation.
The person selling the business is never free of it. They are being paid by instalments and hope that the person they sold it to continues to turn a profit and pay them.
Disputes can erupt easily. Disgruntled purchasers find out the business they were sold does not live up to the hype and then stop making repayments. There are accusations by both sides of the transaction and expensive litigation ensues.