What is Seller Financing?

Seller financing (also called vendor finance or owner financing) is when the seller of a business lets the buyer pay part of the purchase price over time, instead of in full at settlement. The seller becomes the lender for that slice of the deal, and the buyer repays it in instalments, usually with interest.

Here’s the catch most sellers find out too late. Saying yes to seller financing is easy. Getting paid is the hard part, and it depends almost entirely on paperwork people rush through because the handshake already happened.

How does seller financing work in Australia?

The buyer pays a deposit at settlement. The seller lets the rest sit as a debt owed by the buyer, which gets paid down over an agreed term. The buyer takes control of the business on day one and funds the repayments from its cash flow.

On paper that needs two things: a Business Sale Agreement that sets the price and says part of it is deferred, and a separate loan document that sets the interest, repayment schedule, security and what happens on default. Lawpath’s loan agreement template is a sensible base for the second document, with your lawyer adding the security and default terms.

Because the buyer is almost always borrowing for business purposes, seller financing generally sits outside the National Credit Code. That doesn’t mean anything goes. If your loan terms are a standard form you won’t negotiate, the unfair contract terms rules in the Australian Consumer Law can still bite when the buyer is a small business.

A worked example: a $400,000 business sale

Say you sell a business for $400,000. The buyer brings $250,000 to settlement from savings and a bank loan. You finance the remaining $150,000 over three years at 8% interest, with monthly repayments.

Item	Amount
Purchase price	$400,000
Paid at settlement	$250,000
Seller-financed balance	$150,000
Monthly repayment (3 years at 8%)	About $4,700
Total interest earned by seller	About $19,200
Balance still owed after 12 months	About $104,000

That 8% rate is for illustration only. It isn’t a market benchmark, because there isn’t one. Look at the last row instead. A year after handing over the keys, you’re still owed more than a quarter of the price. That’s the number your security needs to cover.

Which seller financing structure fits your deal?

There isn’t one way to structure seller financing. The right choice depends on how much you trust the numbers, how much the buyer can borrow elsewhere and how badly you need a clean break.

Structure	How it works	Best for	Watch out for
Instalments in the sale contract	The sale agreement itself lets the buyer pay the price in stages	Small, simple deals between parties who know each other	Thin default terms and no security unless you add them
Separate vendor loan	The deferred amount becomes a loan with its own agreement, security and guarantees	Most small business sales	More paperwork up front, which is the point
Earn-out	Part of the price depends on future revenue or profit	Businesses whose value depends on the next year or two of trading	Disputes over how profit is measured once you no longer control the books
Bank plus vendor loan	A bank funds most of the price and you fund the gap	Buyers with decent credit but not quite enough	The bank will want to be paid first, so you rank second
Deferred price paid in shares	You take shares in the buyer’s company instead of later cash	Rarely suits a small business seller	You become an investor in a business you no longer run

Our view: for most small business sales, a separate vendor loan with a general security agreement (GSA) and director guarantees is the cleanest option. Earn-outs sound fair, but they’re where goodwill between buyer and seller most often turns into a dispute.

If the buyer is buying the company itself rather than its assets, the price sits in a Share Sale Agreement instead, and you can also take security over the shares you sold. Getting that choice right early saves rework later.

What are the pros and cons of seller financing?

You’ll hear seller financing described as cheaper for buyers, and also as more expensive. Both can be true, depending on who’s holding the pen. Here’s the honest split.

	For sellers	For buyers
Upside	A bigger pool of buyers, a stronger price and interest income on the balance	Less cash needed at settlement and a seller who wants the business to keep performing
Downside	Your exit isn’t really an exit until the last payment lands, and you carry the default risk	Rates are often higher than a bank’s, and covenants can limit how you run the business
Hidden cost	Tax can fall due before the cash arrives	Personal guarantees put your own assets on the line

The biggest myth is that seller financing is a favour. It’s a commercial loan to someone who couldn’t fully fund the purchase elsewhere. Price that risk properly and you’ll make better decisions on both sides.

How do sellers protect themselves if the buyer stops paying?

A common assumption is that if the buyer defaults, you simply take the business back. In practice, a business that’s been run badly for nine months isn’t the business you sold. Staff leave, customers drift and the stock gets sold down. Your protection has to work before that happens.

• Take security over the buyer’s assets. A general security agreement gives you a claim over the business assets if the buyer defaults or becomes insolvent.
• Register on the PPSR within 20 business days. If the buyer company goes into liquidation or administration within six months of a late registration, your security interest can be lost entirely. Make registration a settlement task, not a follow-up job.
• Get director guarantees. Most buyers set up a new company with few assets. Personal guarantees from the directors give you someone with real assets to pursue. Check what those assets actually are first.
• Add covenants that give you early warning. Quarterly management accounts, proof of insurance and a ban on dividends until you’re repaid all help you spot trouble months before a missed payment.
• Spell out default. Set cure periods, default interest at a level that compensates rather than punishes (penalty rates can be unenforceable), and the right to call up the whole balance.

If a bank is funding part of the purchase, expect it to ask for a deed of priority. That document puts the bank first in line and you second. Accept it with your eyes open, and size your loan so you’d still recover something after the bank is paid.

What should buyers negotiate in a seller financing deal?

Buyers often treat the vendor finance documents as a formality because the price is already agreed. That’s backwards. The finance terms decide what happens on your worst month, so they deserve the most attention. If you’re buying an existing business, push for these:

• A right of set-off. If a seller warranty turns out to be wrong, you should be able to reduce the loan repayments by the amount of your claim, instead of paying in full and then chasing the seller.
• Early repayment without penalty. Once you have a trading history, a bank may refinance the balance at a better rate.
• Real cure periods. A few days’ grace for a late payment is the difference between a bad week and losing the business.
• Limits on personal guarantees. Ask for a cap, or for the guarantee to fall away once most of the loan is repaid.
• Trading warranties up to settlement. If the price assumed a pipeline of work, make the seller warrant it. Otherwise you’re repaying a fixed loan for income that may never arrive.

How is seller financing taxed?

This is the part almost every seller misses. Under the Income Tax Assessment Act 1997, selling a business asset is generally a capital gains tax event that happens when you sign the contract, not when you’re paid. So if you sign in May and settle in July, the gain can land in the earlier financial year, even though most of the money arrives over the next three years.

Plan for that cash gap before you sign. Your accountant can tell you whether the small business CGT concessions apply, how the timing works in your situation, and what happens if the buyer never pays some of the balance. Interest you receive on the vendor loan is generally taxed as ordinary income as it’s earned.

GST matters too. A sale of a business as a going concern can be GST-free if the conditions are met and both parties agree in writing. Get that wording right in the sale agreement, because fixing it after settlement is painful.

What we see in Lawpath consultations

Lawpath lawyers work on business sales every week, from cafes and salons to trade businesses, gyms and professional practices. A few patterns come up again and again when seller financing is involved.

• The buyer is often an insider. Many seller-financed deals involve selling to an employee or someone already working in the business. Trust is high, which is exactly why the documents end up too light. Insider buyers default for the same reasons anyone else does.
• Sellers want an exit ramp. A request we see more and more is an option for the seller to require the buyer to refinance with a bank after about 12 months of trading. If the bank says no, regular repayments simply continue. It’s a smart way to shorten your exposure without forcing the deal to fail.
• Buyers sign seller-drafted finance documents. The vendor loan often arrives bundled with the sale contract, drafted by the seller’s lawyer. Buyers ask for a review of the contract and forget the loan terms are where most of their risk sits.
• Pipelines disappear before settlement. We regularly see prices negotiated on expected work that has wrapped up by settlement day. Without trading warranties or a price adjustment, the buyer still owes the full vendor loan.
• Deferred shares get turned down. Offers where a large part of the price is paid in shares in the buyer’s company look generous on paper. Sellers who take advice usually decline, because shares in a business you don’t control are a much weaker promise than a secured loan.

Seller financing checklist: how to set up the deal

1. Agree the headline terms first. Put the price, deposit, financed amount, interest, term, security and guarantees in a term sheet for the sale of a business before anyone drafts the long-form documents.
2. Do due diligence in both directions. The buyer checks the business. The seller checks the buyer: credit history, assets behind any guarantee and real experience running this kind of business.
3. Sign the sale agreement. Use a Business Sale Agreement for an asset sale or a Share Sale Agreement for a company sale, with the deferred amount clearly identified.
4. Document the loan separately. Repayments, interest, covenants, default events and early repayment rights all belong in the loan document.
5. Take and register security at settlement. Sign the GSA and guarantees before the keys change hands, and register on the PPSR straight away.
6. Get tax advice before signing. Your accountant should confirm the CGT timing, the GST treatment and any concessions.
7. Diarise the follow-ups. PPSR registrations expire, buyers change company names and reporting covenants only help if someone reads the reports.

When should you say no to seller financing?

Seller financing isn’t right for every deal. Walk away, or cut the financed amount right down, if any of these apply:

• You need the full sale proceeds to retire or to fund your next move.
• The buyer can’t get any bank funding at all and has no assets to back a guarantee.
• The business relies heavily on you personally, so its value may leave when you do.
• The deposit is so small that walking away would cost the buyer very little.

Saying no doesn’t kill the sale. It can push the buyer towards a bigger bank loan or a lower price, and both can be better than a large unsecured debt.

Seller financing FAQs

What is seller financing?

Seller financing is when the seller of a business lets the buyer pay part of the price over time. The unpaid balance becomes a loan from the seller to the buyer, usually with interest, security and agreed repayments.

Is seller financing legal in Australia?

Yes. Seller financing is a common and lawful way to fund a business purchase. It needs proper documentation, and because most deals are business to business, the National Credit Code generally doesn’t apply. Contract law and unfair contract terms rules still do.

Is seller financing the same as vendor finance or owner financing?

Yes. In Australia it’s most often called vendor finance. Owner financing is the same idea, though the term is more common in US property deals. All three describe the seller funding part of the price.

What interest rate should I charge on seller financing?

There’s no standard rate. Set a commercial rate that reflects the risk of lending to this buyer, usually above what a bank would charge them. Avoid punitive default rates, because a court may refuse to enforce them.

How much deposit should a buyer pay?

There’s no fixed rule. As a seller, ask for as much as the buyer can realistically pay, because a bigger deposit means less exposure for you and more for the buyer to lose if they walk away.

Do I need to register my security on the PPSR?

In almost every case, yes. Registering your security interest on the PPSR protects your place in line against other creditors. Register within 20 business days of the security agreement, or you risk losing it if the buyer company becomes insolvent soon after.

What happens if the buyer stops paying?

That depends on your documents. Well-drafted terms give the buyer a short cure period, then let you charge default interest, call up the whole balance, enforce your security and pursue any guarantors.

Do I pay tax on the full sale price upfront?

Often, yes. For capital gains tax, a business sale generally happens when the contract is signed, not when you’re paid. That means tax on your whole gain can fall due before most instalments arrive. Talk to your accountant before signing.

Can seller financing be combined with a bank loan?

Yes, and it’s common. The bank usually funds most of the price and the seller funds the gap. Expect the bank to require a deed of priority, which means the bank gets paid before you do if things go wrong.

Can the buyer pay off a seller-financed loan early?

Only if the loan terms allow it. Buyers should negotiate a right to repay early without penalty, so they can refinance with a bank once the business has a trading track record.

Ready to get your seller financing deal on paper?

If you’ve already shaken hands on a seller financing deal and haven’t documented it yet, you’re not behind. That’s how most of these deals start. The fix is a few clear documents, signed before settlement, and you’re in a far stronger position than most sellers we speak to.

Lawpath has helped more than 650,000 Australian businesses get their legals sorted, with 550+ legal document templates and access to fixed-fee lawyers when you need a lawyer review of your sale agreement. Start your Business Sale Agreement today.