Standby seller note

When a seller finances part of the price, ask the buyer’s bank whether it requires that debt to rank behind its own loan. “Standby” is a deal label for that arrangement, not a statutory term, so read the signed document. If the seller resists, see what happens when the seller refuses to subordinate the VTB.

What the arrangement controls

BDC says that in almost all cases vendor financing is considered junior debt and subordinate to bank loans and other financing. It adds that on occasion, if financial reporting shows the business doing well and cash flow is strong, the bank may allow some money to go back to the vendor while bank loans are outstanding. BDC also explains that a senior lender is repaid first from the sale of collateral if the borrower defaults. See also subordinated debt.

What to check or ask

• Whether the lender requires a signed subordination or postponement before it advances funds
• Which conditions allow a payment to the seller, and who decides whether they are met
• Whether the bank loan is made under the Canada Small Business Financing Program, whose guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan