Vendor finance vs deferred payments: the one-word difference that can decide your deal

One word moved a bank's entire risk assessment.

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.

Same clause. One word. Two outcomes.

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 bank's loan sits behind a general security agreement over the business.

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.

Run every structure through the same test before it reaches 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.

What is vendor finance?

Vendor finance is a loan arrangement between the buyer and the seller. The seller agrees to receive part of the purchase price over time rather than in full at settlement, usually with interest, and becomes a creditor of the buyer's business. In taking on the buyer's execution risk in exchange for a higher eventual return, the seller is signalling confidence that the business will perform under new ownership.

That confidence signal matters to a bank, and so does the legal detail underneath it. If the seller registers a security interest over the business assets to protect the ongoing payment, the bank's own security position now competes with the vendor's. That is the mechanic the structure test above is built to catch.

What is bank finance?

Bank finance is a lender advancing funds against the strength of the deal, the security on offer (a general security agreement over the business, property, or both) and the buyer's ability to service the debt from the cash flow of the business being acquired. A bank runs its own credit assessment independent of what the vendor is prepared to offer. Its approval turns on the numbers standing up on their own rather than on the seller's confidence in the business.

Bank finance is the larger, more standardised piece of most acquisition capital stacks, and the piece with the least room to move. A lender's serviceability test does not flex because the seller believes in the business.

How do the two combine in a real deal?

In a typical structure the buyer brings a cash contribution, generally around 30% of the purchase price where no property is offered as security, though this moves lower when property support is available. The bank funds the largest share against security and serviceability, which you can size early with our business acquisition calculator. Any gap between what the buyer can contribute and what the bank will fund is where a vendor component often gets discussed.

The trap buyers fall into is assuming that gap can be filled with vendor finance and that this improves their equity position, when it does not. Banks treat vendor finance as additional debt sitting behind their own rather than as buyer equity, and the ongoing vendor repayments still count against the business's servicing capacity. A gap-filler structured as vendor finance can weaken a deal in front of a credit team rather than strengthen it.

This is why, on nearly every acquisition I work through, the conversation moves toward reshaping the vendor component into something a bank reads more favourably: an earn-out tied to revenue, or a deferred payment with no competing security. Same money and timeline to the seller, with a different characterisation and a different outcome at credit assessment.

What does a bank actually think when vendor finance shows up in a deal?

A bank reads vendor finance two ways at once. Challenger lenders show more flexibility case by case, and private credit tolerates more complex seller-funded structures, though usually only above a certain deal size and at a higher cost of capital.

My practical guidance to buyers is to have this conversation with a broker before the heads of agreement is drafted rather than after. Restructuring a vendor component once the documentation exists is a legal exercise. Getting the structure right before that point is a conversation.

A deferred component is normal. The question is which shape it takes.

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.

The words in the documentation decide the deal.

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.