Bank loan vs vendor financing

Most acquisitions are financed with more than one source of money, and a bank loan and vendor financing often sit side by side in the same deal rather than as a strict either-or. Still, they work in fundamentally different ways, and understanding the difference matters whether they are being combined or chosen between.

Bank loan

A bank loan — often supported by a federal program such as the Canada Small Business Financing Program — gives the buyer cash to pay the seller in full at closing, and the seller has no further financial stake in the business afterward. The buyer instead answers to the bank, which will typically require security, personal guarantees and covenants, and will underwrite the loan against the business’s demonstrated ability to service the debt.

• The seller is paid in full at closing and walks away with no ongoing exposure to the business
• The buyer’s obligation runs to a lender, with security and covenants attached
• Approval depends on the business’s cash flow and the lender’s own underwriting standards
• A government-backed program can improve terms but adds its own eligibility rules to satisfy

Vendor financing

Vendor financing, sometimes called a vendor take-back, has the seller accept a note for part of the price instead of cash at closing, repaid over an agreed schedule out of the business’s future earnings. It signals the seller’s confidence in the business, can bridge a gap a bank will not fully finance, and gives the buyer a lender who already knows the business — but it leaves the seller carrying real risk if the business underperforms after they leave.

• The seller remains financially exposed to the business’s performance after closing
• Can bridge financing gaps a bank is unwilling to cover on its own
• Repayment terms, security and priority relative to any bank debt are all negotiated
• How the note is structured affects how it is taxed for the seller

How to choose

For a buyer, the mix usually comes down to how much a bank will lend against the business and how large a gap remains once a down payment is applied — vendor financing is frequently what closes that gap rather than a full substitute for a bank loan. For a seller, willingness to carry vendor financing signals confidence but should be weighed against how much ongoing risk they are prepared to hold after they have left day-to-day control of the business. Where more than one lender is involved, the priority between them needs to be documented, not assumed.