VENDOR FINANCE VS DEFERRED
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VENDOR FINANCE VS DEFERRED
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Vendor finance and a deferred payment can describe the exact same arrangement between a buyer and a seller: money paid after settlement. Banks read them as two different financial instruments, and getting the wording wrong in a heads of agreement can turn a fundable deal into one no major bank will touch.
I have had a deal nearly fall over on one word. The heads of agreement read "deferred payment" through every draft, until a redline came back changing it to "vendor finance," with the dollar amount, the timeline and the parties left untouched. The bank's risk assessment of the whole transaction moved the moment that one word changed.
Buyers hear both phrases as describing the same thing, paying the seller some money after settlement. From where a bank sits, they are two different financial instruments, and the difference between them decides whether the deal gets funded.
A deferred component sits in almost every Australian acquisition I see, so the real task is making sure it is documented as a structure a bank will accept, before a solicitor drafts the heads of agreement.
The clause below is the one I see most often in a heads of agreement, with the bracketed term doing all the work. The dollar figure, the timeline and the parties stay identical either way. The only thing that moves is the bank's read of the deal.
The purchaser shall pay the vendor $200,000 by way of within 24 months of completion.
A contractual obligation to pay a fixed sum at a future date, with no loan and no competing security interest, treated like an earn-out in servicing calculations.
A loan from the seller, who becomes a creditor, often paired with a registered security interest (PPSR) competing with the bank's general security agreement, treated as competing debt in servicing calculations.
Tap the highlighted term to flip the structure
Vendor finance with a registered security interest means another creditor holds a claim over those same assets, and the vendor's repayments count as additional debt service when the bank calculates servicing.
On a $2,000,000 purchase, a $200,000 deferred payment is generally acceptable to lenders as part of the structure. The same $200,000 structured as vendor finance, with a registered security interest, can make the deal unfundable at the major banks. Vendor finance also does not count as the buyer's equity contribution. Lenders treat it as additional debt, not equity, so the buyer's own contribution still has to meet the lender's minimum on its own.
The major banks generally will not accept vendor finance where the vendor registers a security interest over the business. Challenger banks are often more flexible on structure, but still need the legal shape of any vendor component settled before they will commit. Private credit is more tolerant of complex structures, and prices accordingly, typically on larger deals.
Before a deal reaches a lender, I run it through the same test: (1) will the vendor receive any ongoing payments after settlement, (2) is there any PPSR registration, charge or security interest in the vendor's favour, and (3) if the answer to both is yes, the structure is vendor finance, and it should be restructured before it goes anywhere near a lender.
The restructure usually changes neither the amount nor the timeline, only the legal characterisation. The vendor still gets paid on the same schedule. What changes is the paperwork describing how they get paid, which is why the conversation belongs before the heads of agreement is drafted. Once the wording is locked into a signed document, unpicking it costs time, legal fees, and in the worst cases, the deal itself.
Deferred components are the norm in Australian acquisition deals, typically running to somewhere between 10% and 20% of the purchase price. Experienced searcher-investors in this market report a deferred or earnout component in essentially every deal they do. The useful question for a buyer is which legal shape that component takes.
Earnouts, where payment ties to the business's performance after settlement, are the cleanest bank-friendly shape, because the obligation only bites once the business is actually performing. Where a performance metric is used, revenue is often preferred over profit, because revenue is observable and much harder to manipulate through post-settlement cost decisions such as higher salaries or discretionary spending.
On larger deals, vendors sometimes roll a stake into the new entity instead of taking an earnout, and where the buyer's loan is secured by property rather than the business itself, a vendor note can become more workable. Both are structure-specific, so take legal advice before relying on either.
A vendor component in the price is normal, and it often helps a deal get done. The live question is which legal shape it takes, and the documentation settles that question before a bank ever forms a view.
I am happy to look at a proposed structure before the lawyers draft the heads of agreement. Raising it at that point can save a deal that would otherwise fall over on a technicality.
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