Vendor finance could be a solution for financial planners struggling to obtain finance to buy new practices, according to The Fold Legal.
As interest rates go down, changes to renumeration structures for advice business and defaults on existing borrowers had affected the banks willingness to lend funds.
This had created an issue where advisers without a track record of managing a client or the lack of required collateral meant they may not be able to secure finance.
Katie Johnston, The Fold Legal senior associate, said a potential solution was vendor financing.
“Vendor finance is where the seller funds all or a part of the purchase price,” Johnston said.
“The buyer pays a deposit on completion and then repays the balance (with interest) over an agreed period of time via regular repayments. Essentially, it is a loan between the buyer and the seller.”
Vendor finance would ensure both seller and buyer remained committed by the seller ensuring clients move to the buyer as their new advisers and the buyer servicing those clients to maintain revenue.
Sellers providing vendor finance would still require security over the buyer’s assets, undertake due diligence on the buyer over warranties and indemnities and managing the risk of recovery.
“Vendor finance can be used to fund the book purchase entirely, but buyers may want to restrict it to funding the first instalment, so the revenue earned from the purchased book can be used to service the loan,” Johnston said.
“Then once retained and ongoing revenue has been demonstrated, the buyer can often obtain traditional funding from a bank/financier to cover the balance.
“This is also optimised when the subsequent instalments are much smaller percentages of the overall purchase price.”