Simply put, vendor financing includes a loan that is given to a customer by the vendor. This agreement obligates the vendor to lend a part of the price of a certain product or service to the customer. This is an especially popular model with older people as they are looking to sell their businesses with no hassle whatsoever.
This vendor financing model is growing drastically and many people are turning to it. Here is why.
How it works in practice
If you plan on selling your business for $2 million and the person that wants to buy it doesn’t have the cash initially, you can simply borrow them the money so that they can make the purchase. By signing a legally binding agreement on both sides, the borrower takes over the business but has to use the profits to pay for the purchase within a certain period of time or they will face legal consequences.
How the vendor benefits
Vendors have many ways to benefit from these kinds of deals. Complete control of the deal is in your hands. You can inflate the purchase price as the buyer might see it as a good investment opportunity he or she would not want to miss. You get additional money through interest as the buyer repays it over time. You won’t have to do anything in the company while still having an annuity.
How the buyer benefits
As a buyer, in this kind of deal, you won’t need any financial power to acquire a business, you can simply repay from the first profits you make but this is why it is essential to think about the investment and whether that organization has potential. On the other hand, you can also recognize organizations that can be improved immediately and return the money faster than expected.