Vendor Finance Agreements: A Basic Summary
What is it?
A vendor finance agreement is a contract between a buyer and a seller, whereby the seller agrees to assist with funding the purchase price. The arrangements vary depending on the circumstances. Typically, the buyer will pay a portion of the purchase price at settlement, at which time ownership is transferred. They will then pay the remaining amount at a later date. The vendor will usually charge interest on the outstanding amount and may require security or some other guarantee that full payment will be made.
These agreements typically arise where there is a contract for sale of land, or when one a business is being sold.
Application for small business people
One of the primary advantages of a vendor finance agreement is the flexibility that it offers to the parties. Financial institutions are generally very rigid in their approach to lending, and they are also less likely to advance funds during an economic downturn. These factors can make large transactions difficult for small business people. A vendor finance agreement may enable a transaction that otherwise would have failed.
It is very important that each party to a vendor finance agreement is aware of their obligations and the risks involved. Financial and legal advice is essential in these transactions.
6 key things to consider
Before signing a vendor finance agreement, it is important to consider the following six key elements:
- What are the relevant time periods for making repayments?
- What will happen if the purchaser is unable to make the repayments as agreed?
- What is the interest rate charged by the vendor on the amount borrowed by the purchaser?
- Has the purchaser’s interest in the property been registered in the title by way of a caveat?
- Does the agreement allow for early repayments if the purchaser is able to do so?
- Who is responsible for incidental costs to the business or property, such as maintenance, rates, insurance, taxes and so on?
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Joe Kafrouni, Accredited Specialist in Business Law, Kafrouni Law
Disclaimer: This article is general information only and is not legal advice. Before acting on it, get advice on your own circumstances. To the extent the law allows, Kafrouni Law accepts no liability for any loss arising from reliance on it. This article is the copyright of Kafrouni Law.
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