Latest US Small Business Trends (SBT) insight report revealed that the most common way to finance an SME purchase was through vendor finance (48%) and commercial bank loans (27%).
The report also found that only 22% of applicants in the US were successful in obtaining a bank loan to purchase an SME. Most applicants were rejected due to a lack of liquid assets or/and an insufficient source of income. The low rate of success in securing a business loan has resulted in a growing reliance preference on vendor finance when purchasing an SME.
Vendor finance involves the vendor providing a private loan ,normally secured against the business. This option is sometimes the only way to finance an acquisition.
The SBT data revealed there was an average increase of 8.3% in acquisitions through vendor finance and a 4.4% decrease in acquisitions through commercial bank loans from FY2021 to FY2022.
Although these findings are based on US data, the same trends exist in Australia.
Vendor finance is unpopular when it ranks after bank finance but if it replaces it with appropriate security in place, it is an option worth considering.