How vendor finance works in a business sale, step by step
How Vendor Finance Works | Switchboard Finance
Accommodation Finance
Vendor Finance · Vendor Carry · Going Concern
How vendor finance works in a business sale, step by step
Picture a buyer agreeing to a regional going concern motel, with the bank funding the bulk and a real gap left over. A vendor carry closes that gap. Here is how the structure runs, from the money stack to the refinance that clears it.
Quick Answer
Vendor finance is where the seller leaves part of the sale price in the deal, paid back over time and sitting behind the bank. In a going concern business sale it closes the final equity gap. See our full vendor finance guide, or how a second mortgage secures it.
What a vendor carry actually is
A vendor carry is simply the seller leaving part of the price in the deal and being repaid over time. You will also hear it called a vendor carry, also called a vendor take-back or seller finance, but it is the same instrument under three names. The buyer pays a deposit, a senior lender funds the bulk against the business, and the vendor carries the last slice so the stack reaches the full price.
In a going concern sale of a motel, park or pub, that final slice matters because lenders advance against a conservative going concern valuation that can sit below the agreed price. The vendor leaves in typically 10 to 25% of the price, indicative and varies by deal, repaid with interest. In deals I have seen, a measured vendor offering a carry is usually a sign of confidence in the trade they are selling, not a red flag.
How the money and the security stack up, step by step
The deal is a stack that has to reach the full price: deposit, senior facility, then the vendor's carry filling the last slice. The carry is second-ranking behind the senior lender, which is the single fact that shapes everything else about how it is priced and documented. Because it carries more risk than the first mortgage, the carry is usually interest-only, with a 2 to 5 year exit, indicative and varies by deal.
From where I sit arranging the senior debt, the order of operations is what keeps a deal clean: agree the price, confirm the going concern valuation and the senior facility, then size the carry to bridge whatever gap is left. The carry is secured by a second mortgage over the property and a PPSR registration over the business assets, so the vendor holds real security, not just a promise. None of this works, though, until the bank agrees to sit in front, which is the next step.
When a vendor carry works, and when it stalls
A carry works when it fills a genuine structural gap in the price and every party is pricing the same clean exit. It stalls when it is used to paper over a deal that does not stack, or when the paperwork is left until the last minute. The difference is almost always preparation, not appetite.
When a carry works
- It fills a true equity gap, not a serviceability hole
- The buyer has a meaningful deposit and real skin in the game
- The senior lender has consented in writing to second ranking
- A deed of priority and PPSR registration are in place before settlement
- Both sides are pricing the same refinance exit from day one
When a carry stalls
- It is stretched to rescue a price the valuation will not support
- The buyer is over-leveraged with little of their own cash in
- Consent is assumed rather than confirmed with the senior lender
- Security and priority are left as an afterthought
- Pure timing pressure is mislabelled, when it belongs with a caveat loan or private lending
Locking it down: consent, priority and the exit
The vendor's second position behind the bank is not automatic, so the senior lender's written consent to the second ranking is the deal-critical item. A senior lender says yes far more readily when the file is complete: the consent request, the valuation, the proposed deed of priority and a credible exit strategy. Get that wrong and the whole structure waits.
Two documents do the heavy lifting. A deed of priority fixes the recovery order between the senior lender and the vendor before anything goes wrong, and the PPSR registration over the business assets records the vendor's interest; the official process for that registration is set out on the government's PPSR registration guide. The plan from settlement is always to refinance the carry out once the business has traded under new ownership, because the fresh trading record lets a lender assess the business and clear the vendor. The documents themselves are your solicitor's work; arranging the senior facility and structuring the deal around the carry is ours. For an owner weighing a carry as one way to step back from the business, it sits alongside the other options in our guide to partial sale and succession. For pure timing pressure between exchange and settlement, that is a job for private lending, not the carry.
A vendor carry is the last slice that gets a going concern deal done: the seller leaves part of the price in, second-ranking behind the bank, on interest-only terms with a defined refinance exit. It works when it fills a real equity gap, the buyer has genuine deposit, and the senior lender has consented in writing with a deed of priority and PPSR registration locked in before settlement. It stalls when consent is assumed and the paperwork is left late.
Key takeaway: size the carry to the gap, secure the senior lender's written consent early, and price the refinance exit from day one.Frequently Asked Questions
A bank can allow vendor finance behind its loan, but it is never automatic. The senior lender has to agree in writing to sit in front of the vendor, and it usually wants a deed of priority that spells out who recovers first. A complete file, including a credible exit strategy, is what gets that consent over the line.
Vendor finance is usually secured by a second mortgage over the property plus a PPSR registration over the business assets, so the two are closely related but not identical. The second mortgage is the security; the vendor carry is the loan it secures. Both rank behind the senior lender's first mortgage.
A vendor usually carries the final slice of the price, typically around 10 to 25 percent, indicative and varies by deal. The exact share depends on the deposit, the going concern valuation and how comfortable the senior lender is. Our vendor finance guide walks through how the slice is sized.
A vendor carry is usually paid out by refinancing it once the business has traded under new ownership for a couple of years. The fresh trading record lets a lender assess the business and clear the vendor, which is why a credible exit strategy is priced in from day one. The carry is temporary by design.
If the buyer cannot repay the carry, the vendor can enforce their security, but ranking second they recover only after the senior lender is satisfied. A meaningful deposit, registered security and a deed of priority are what protect the vendor's position. This is why vendors structure the deal carefully before settlement, not after.
FBAA Accredited
