What is Vendor Finance?

Vendor Finance Explained 

Farm buyers and sellers have very clear-cut motivations - buyers wish to offload their property for an appropriate price, while sellers are willing to part with their money to acquire the same property. This means that when a buyer finds it difficult to get financing to purchase a farm, it is frustrating for all parties involved. 

This is where vendor finance comes in. 

Vendor finance describes an arrangement in which the farm buyer pays a deposit to the seller to acquire the property, and the seller lends the rest of the money, which the purchaser agrees to pay back at an agreed rate. This enables the buyer to access the land, and provides the exiting farmer to continue to receive a consistent return.

Vendor finance in practice

Dan is an aspiring farmer who has been working on John and Debbie’s berry farm for the past three years. John and Debbie have no children that want to take on the farm and would like Dan to purchase the farm from them.

They negotiate a vendor financing arrangement where Dan purchases the farm with a ten per cent deposit and pays 5.5 per cent interest on the remaining balance. Dan has plans for niche market opportunities and feels that he can meet these interest costs.

However, John and Debbie would like to receive all proceeds from the sale in ten years’ time to fund their retirement. The agreement includes terms that Dan needs to find bank or other finance by that time, or sell the property and pay his debt to John and Debbie.

Advantages of vendor finance

  • Allows new entrants to purchase land when bank debt is unavailable in whole or in part
  • Provides exiting farmers with a return on their asset until they sell
  • Purchaser can invest confidently in land improvements or diversification
  • The spread of cash flow can be advantageous to the exiting farmers in terms of tax and retirement planning
  • The landowner retains title to the land until fully paid, ensuring asset protection
  • Most solicitors are familiar with vendor finance

Disadvantages of vendor finance

  • The interest rate paid on the loan will generally be more expensive than bank debt
  • Vendors may not want their asset tied up in lending agreements for a long period

For further information: 

If you want to learn more about vendor finance or are looking for other tips and tricks to help you uncover farm ownership opportunities, head to the Cultivate Farms website or email Sam at sam@cultivatefarms.com.

Author: Sam Marwood is co-founder of Cultivate Farms, a new social enterprise that matches investors and retiring farmers with new farmers to own and operate the farm together. 


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