Saturday, August 9, 2025

What’s the Collateral for a Vendor Financing Note?

 Question of the week:

When you have a vendor take-back (seller financing) in a business purchase, what exactly serves as the collateral? https://youtu.be/CzbU6DCLsVo 


The Short Answer

In most cases, the business itself is the collateral.

It works just like other secured loans:

  • Car loan? The car is the collateral.

  • Mortgage? The house is the collateral.

  • Vendor take-back note? The business you’re buying is the collateral.

If the buyer stops making payments, the seller can foreclose and take the business back.

Why Some Sellers Worry

A common fear from sellers is:

“What if the buyer runs the business into the ground before I get paid?”

It’s a valid concern. If the business loses value, so does their collateral.

But here’s the silver lining because the business is the collateral, the seller has a vested interest in your success. They’re often more likely to:

  • Provide thorough training during the transition

  • Stay available for mentoring

  • Help troubleshoot problems

The healthier the business, the more likely the seller gets paid in full.

What About Other Assets?

If there’s a bank involved in the deal, hard assets like buildings, vehicles, or equipment are usually pledged to the bank first.

Buyers’ personal assets like a home are often tapped for the down payment through refinancing or a line of credit. By the time the vendor note is in place, there’s rarely much left for the seller to claim beyond the business itself.

Bottom Line

In most small to mid-sized business deals, the vendor financing note is secured mainly by the business.

That’s why sellers who agree to it tend to remain engaged. They know their payout depends on you keeping the business healthy and profitable.

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– David C. Barnett


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