Vendor loan or bank loan to buy a French SME

Quick answer. A vendor loan does not replace a bank loan: it completes it. The seller accepts deferred payment of part of the price, which reassures the bank and closes the financing round. Since 1 January 2019, article 1681 F of the French Tax Code lets the seller spread payment of capital-gains tax, under conditions (fewer than 50 employees, EUR 10m).

Buying an SME almost always means assembling several financing blocks. The real question is not "vendor loan or bank loan", but how to combine them to make the plan credible to the banker and sustainable for the buyer. The vendor loan, whereby the seller agrees to be paid partly later, is a powerful but poorly understood lever, on both sides of the table.

In the buyout files we handle, the most common sticking point is not the price: it is closing the financing plan. The bank rarely funds 100 % of the price, the buyer lacks equity, and the seller wants an immediate cheque. The vendor loan is often the piece that unblocks the whole deal.

At Hayot Expertise, a firm registered with the Ordre des experts-comptables of Ile-de-France, we work alongside both buyer and seller to build a buyout financing plan that is legally and fiscally sound.

The bank loan (senior debt) remains the backbone of the financing. The vendor loan is a complement: the seller grants a payment deferral on part of the price, usually a minority share in market practice. No maximum percentage is set by law: it is freely negotiated.

The vendor loan brings no fresh cash to the table. It reduces the external financing need on the closing day by pushing back part of the disbursement. That is both its strength and its limit.

Our reading#

The vendor loan is not a substitute for the bank, it is a trust accelerator. When the seller agrees to be paid later, it sends the banker a strong message: the seller believes in the durability of the business being sold. This signal often unlocks senior debt. Conversely, a seller demanding 100 % cash on closing day mechanically weakens the plan. That is why we raise the vendor loan very early in the negotiation, even before the letter of intent.

The vendor loan interest rate is freely set between the parties. In practice it is often below the bank rate, because the seller seeks first to secure the sale, not to maximise a financial return. The buyer gains on the overall cost of financing.

In return, the seller requires guarantees. They fall under security law and are negotiated case by case:

• pledge of the purchased shares or of the business in favour of the seller;
• personal surety from the buyer or a third party;
• on-demand autonomous guarantee or retention-of-title clause;
• acceleration clause making the entire balance due on a payment default.

These securities must be coordinated with those already taken by the bank. When the deal runs through a holding company, the order of guarantees and the ranking of creditors become a technical subject in their own right, which we address when setting up a buyout holding company.

Here is the point many sellers discover too late. The capital gain on the sale is taxed in full in the year of the sale, even if part of the price is paid later through the vendor loan. The taxable event is the sale, not the cash collection (French tax guidelines BOI-RPPM-PVBMI-30-10-10).

In concrete terms, a seller may have to pay capital-gains tax at the flat tax of 31.4 % (12.8 % income tax plus 18.6 % social levies for 2026) on the whole price, while having collected only a fraction of it. If the buyer then defaults on the vendor loan, the seller has paid tax on sums never to be received.

Spreading capital-gains tax (art. 1681 F French Tax Code)#

There is an answer to this risk. Article 1681 F of the French Tax Code, available since 1 January 2019, allows the seller to spread payment of capital-gains tax when granting a vendor loan, under cumulative conditions.

The key point: the spreading applies to payment of the tax, not its base. The capital gain remains taxed in full in the year of the sale; only settlement with the Treasury is staggered. This mechanism finally aligns the seller's tax cash flow with the pace of price collection.

Common case#

Recently, the director of an industrial SME (fewer than 50 employees, EUR 6m turnover) approached us to structure the sale of the majority of his shares to his plant manager. The buyer had limited equity and partial bank approval. We proposed a vendor loan on a minority share of the price, secured by a pledge of shares, and filed the spreading request under art. 1681 F. The result: the financing round closed, and the seller did not have to advance tax on sums not yet received.

There is no single structure. The right mix depends on the buyer's equity, the strength of the target and the seller's appetite for risk.

1. 100 % bank financing: suitable when the buyer has solid equity and the bank lends broadly. The seller is paid in cash, with no default risk, but capital-gains tax is due immediately.
2. Mixed senior debt plus minority vendor loan: the most common scheme. The vendor loan bridges the gap between equity, bank debt and price, while reassuring the banker. Compatible with art. 1681 F spreading if conditions are met.
3. Vendor-loan dominant: to handle with care. It maximises the seller's exposure to buyer default. Reserved for high-trust situations (family or internal buyout by a manager) and always backed by robust securities.

For leveraged deals, the vendor loan often combines with a holding company that borrows and repays from the target's dividends: we detail this mechanism in our analysis of the leverage effect of an LBO.

1. Quantify the real financing need after equity and bank approval in principle.
2. Have the company valued to set a defensible price, the basis of any negotiation, which we secure through a valuation of the target company.
3. Run a due diligence before the buyout to gauge the hidden risks weighing on repayment capacity.
4. Negotiate the vendor-loan share, the rate, the term and the schedule.
5. Lock the seller's guarantees in line with those of the bank.
6. Check eligibility for spreading under art. 1681 F and file the request on time.
7. Coordinate everything with the seller's tax position on the sale, especially the capital-gains tax timing.

• Capital-gains tax is due in the year of the sale, even with a vendor loan: plan the cash flow or the spreading.
• Art. 1681 F spreading is conditional on providing guarantees: do not overlook them in the agreement.
• The 50-employee and EUR 10m thresholds are assessed in the year of the sale: exceeding them closes the door to the scheme.
• The choice between selling the business or the shares affects eligibility for spreading (the sale of shares requires transferring the majority of the capital).