What Do Banks Think About Vendor Finance Agreements?
We recently invited Scott McGregor, Commercial Broker at Mortar Finance to a webinar on the topic, ‘Funding Your Next Business Acquisition.’
Here’s what he said -
We see a lot of business acquisitions where the vendor was quite happy to provide some finance to the buyer on that business. It is accepted by the banks, but it is probably lower on their appetite scale than having genuine cash or property equity into the transaction. But, as long as the bank can understand the vendor finance agreement, have that provided to them and potentially have their lawyers read through it to understand how it may impact on the bank debt, some vendors will want security over the business. So if the vendor's got security over the business, the bank will want to know that they can have a preferential security position over that business.
The Vendor Finance Agreement may include terms around how any enforcement action from the vendor could be triggered. I have seen some vendor finance agreements whereby one missed payment under that vendor finance arrangement, can trigger enforcement action by the vendor.
If they have a general security agreement over your business and they enforce against the business, the bank really has two options, they can either pay out the vendor to stop the action, or they end up joining the action with the vendor. And that is where the bank then obviously wants to be very comfortable around that agreement before they get into that position. Because it can leave the bank with really limited options in terms of what they do, which is why it's important for the bank to understand what that vendor finance arrangement is.
It is certainly something that is able to be done as long as all the parties can understand how it works and be comfortable with it, then it is a valid option to have some additional support or finance around the business. If you have got a repayment to the vendor and to the bank, they will want to understand that the business can still make, or afford all of those repayments and not just the payments to the bank.