What is a vendor loan note?
Short Answer
A vendor loan note is an arrangement where the seller lends part of the purchase price back to the buyer, repaid over time with interest. It bridges the gap between the price a seller wants and the cash a buyer can raise.
Full Explanation
A vendor loan note, also called vendor finance, is a way for a seller to help fund the purchase of their own business.
Instead of receiving the whole price in cash at completion, the seller takes a loan note for part of it, which the buyer repays over an agreed period with interest, usually from the acquired business's cash flow. This bridges a common gap: the price a seller wants and the cash a buyer can raise upfront. For the buyer, it reduces the funding required at completion and signals the seller's confidence in the business, since the seller only gets fully paid if the business performs. For the seller, it carries credit risk — repayment depends on the buyer staying solvent — which is why reverse due diligence on the buyer and appropriate security or ranking matter.
Vendor loan notes are common in UK owner-managed business sales and management buyouts, often sitting alongside bank debt and an earn-out in the overall structure. They differ from an earn-out in that repayment is a debt obligation, not contingent on hitting performance targets.
See how to finance a business acquisition and the vendor loan note definition.
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Further Reading
A potential obligation arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity's control, or a present obligation where payment is not probable or the amount cannot be reliably measured.
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