Vendor Financing

Question:
My partner and I would like to purchase a small cafe. It is being sold for $39k. The banks won’t lend us money as they say cafes are too risky and we don’t have enough equity in our unit. What are our options? What is vendor financing and how do we go about it?

Answer:
Vendor financing is basically where the vendor allows you to pay off the business over an agreed period of time. Not all vendors are willing to enter into a vendor finance arrangement so you will need to discuss this with the owner of the cafe first to see whether they are willing to consider this.

If this is your chosen finance path you will need to seek the advice of a legal professional to draw up an agreement clearly setting out the terms of the finance.

There are many issues to consider when looking at vendor finance including, but not limited to:

  • what happens in the event of a default on payments?
  • who owns the business while the finance is in place?
  • will the vendor have any say in how you run the business if he is providing the finance?

Generally speaking banks look for 3 things when considering an application for finance:

  1. what is the financial track record of the business?
  2. what security can you offer to cover the loan?
  3. what experience do you have in the industry and in running a business?

Other issues you need to consider as part of the “buying a business” process include:

  • have you had an independent valuation on the business?
  • why are the current owners selling the business?
  • if you have not been in business before, are you sure that you are ready to take the plunge?
  • have you prepared a business plan and cash flow for the business?
  • what working capital will you need in addition to the purchase price of the business?

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