In France and Switzerland, vendor loans are structurally embedded in many SME transactions for two reasons: (1) bank acquisition financing for SMEs is rarely 100% of the purchase price — banks typically finance 50–65%, leaving a gap that equity from the buyer and a vendor loan must fill; (2) the French État can guarantee up to 70% of an acquisition loan through Bpifrance guarantee schemes, but these don't cover the full price. The vendor loan fills the structural financing gap.
A typical vendor loan structure: 15–25% of total consideration, 4–6 year term, interest at 4–7% per annum, bullet repayment at maturity or amortizing annually. The vendor loan is subordinated to senior bank debt — meaning in a liquidation, the bank is repaid first. This subordination means the vendor loan carries meaningful default risk, which sellers often underestimate when comparing headline price (which includes the vendor loan) to their actual cash position.
Sellers should negotiate: (1) a pledge over shares or assets as security for the vendor loan; (2) information rights during the loan period (annual accounts, management accounts); (3) acceleration triggers if specified financial ratios are breached; (4) cross-default with bank debt (if the bank calls the loan, the vendor loan is also due). Without these protections, a vendor loan is essentially an unsecured loan to the buyer — a credit risk that sellers rarely fully price.
Vendor loan cash flow analysis
Total consideration: €18m. Structure: €10m cash at closing (bank + equity), €3m earnout (2-year, 70% probability = €2.1m expected value), €5m vendor loan (5 years at 5%, bullet). Vendor loan present value at 8% discount rate: €3.4m. True economic value to seller: €10m + €2.1m + €3.4m = €15.5m vs headline €18m. The gap (€2.5m) represents discount rate and default risk.
Frequently asked questions
Is a vendor loan the same as an earnout?
No, though both are forms of deferred consideration. A vendor loan is a fixed obligation — the buyer must repay the principal and interest regardless of business performance. An earnout is contingent — the buyer only pays if specific financial targets are met. A vendor loan is less risky for the seller (fixed obligation, not performance-dependent) but carries credit/default risk. An earnout is performance-dependent but has no default risk if targets are missed.
What happens to the vendor loan if the buyer re-sells the business?
This depends on what was negotiated. Without a change of control provision, the new owner inherits the business and the debt obligations — including the vendor loan. Sellers should negotiate a change of control trigger that makes the vendor loan immediately repayable if the business is sold, reducing the risk of the loan extending over multiple ownership changes.
Can the vendor loan be guaranteed by Bpifrance or another body?
Bpifrance's SME transmission guarantees apply to senior bank debt, not directly to vendor loans. However, in some structures, a Bpifrance guarantee on the senior bank portion increases bank financing, which reduces the required vendor loan amount. SIAGI and other regional guarantee bodies provide similar guarantee products that can be used to improve overall financing structure.