A B2B services business based in Singapore. EBITDA of SGD 650,000. Clean books, recurring revenue, twelve years of operating history. The buyer signs the LOI and needs to finance the acquisition. Two options are on the table: bank debt or seller financing. They go to the bank first.
The bank comes back with this: three times EBITDA in senior debt, a personal guarantee against all assets, a floating rate at a significant spread over SORA, financial covenants requiring minimum interest coverage of 1.5x tested quarterly, and an equity contribution of 40 to 45 percent to close the gap.
The deal works — barely. But there is no room for a slow first quarter, a client who stretches payment terms, or a piece of equipment that needs replacing ahead of schedule.
Now suppose the seller is willing to hold 30 percent of the purchase price as a vendor note at 5 percent per annum over four years, subordinated to the bank’s senior debt. The capital structure looks different. The bank’s senior debt covers a smaller base. The blended cost of capital falls. The covenant package becomes easier to maintain because the interest burden is lower. And the seller — now a subordinated creditor who needs this business to succeed for another four years — has a structural reason to remain helpful after the handover.
This is what seller financing actually does in an SME acquisition, and it is worth understanding before the bank becomes the only option on the table.
What Bank Debt Actually Costs in a Tightening Cycle
Bank debt has one obvious advantage: it is institutionally priced, reasonably transparent, and does not require the seller’s ongoing cooperation. For a buyer with strong credit, a clean acquisition target, and a deal that fits neatly within the bank’s SME lending parameters, it can be the right tool.
The problem is that the tightening cycle has moved those parameters considerably. Across Singapore’s mid-market SME lending environment, banks compressed average leverage multiples significantly between 2022 and 2024 as rising interest rates pushed up debt service requirements and compressed interest coverage ratios in the acquisition finance math. A deal that carried 4x leverage at a narrow spread in 2021 might clear 2.5x at a significantly wider spread today. The equity gap that opens between those two structures needs to come from somewhere.
Beyond the leverage compression, bank covenants in a tightening environment are written for the bank’s protection, not for an operator’s flexibility. Quarterly financial covenants, material adverse change clauses, and cross-default provisions create a structure that functions well when the business performs exactly as modeled. They are precisely the wrong structure for a new owner learning the business in the first twelve months.
What Seller Financing Actually Costs
A vendor note typically runs at 4 to 7 percent per annum in Singapore-dollar SME acquisition transactions, structured as a subordinated loan to senior bank debt, repaid over three to five years. The rate is lower than most buyers expect because the seller is not a commercial lender optimizing for spread. They are a business owner who has agreed on a price and wants to receive it. The vendor note is the mechanism by which they receive the portion of the price the senior lender’s proceeds could not cover.
In the United States, seller financing is involved in approximately 80 percent of successful small business transactions, according to data from the Business Brokerage Press. In Southeast Asia, formal data is harder to source, but the structural dynamics that drive its adoption are present and arguably more pronounced given current regional lending conditions.
The real cost of seller financing is not the interest rate. It is the ongoing relationship with the seller. That relationship is either an asset — a willing phone call when a key client goes quiet, an introduction to a supplier who only works on trust — or a complication. Which one depends on how clearly the transition terms are documented and how honestly both parties have read each other’s motivations during the negotiation.
What Buyers Get Wrong When Comparing the Two
The most common mistake buyers make when comparing bank debt and seller financing is to treat them as equivalent-cost options and choose based on interest rate alone. That framing misses the structural differences that matter most.
Bank debt carries a covenant package. Seller financing, in most structures, does not. An acquisition target with any meaningful revenue concentration, customer tenure risk, or working capital seasonality will face moments when those bank covenants test differently than the model projected. A seller note held by someone who wants the business to succeed rarely accelerates repayment at the first sign of stress.
The second mistake is to assume that seller financing reflects the seller’s confidence problem — that it is what you get when the seller cannot find a cleaner exit. In most cases the opposite is true. A seller willing to hold a note has usually done this before or has been well-advised. They understand that a buyer with a fully bankable deal does not need them to stay in. The vendor note is the mechanism that gets a deal done at the right price rather than forcing a discount.
Which Structure Makes Sense Right Now
With senior lending conditions in Singapore’s mid-market still tighter than pre-2022 norms, a blended structure — senior bank debt at 2 to 2.5x EBITDA, seller note at 25 to 30 percent of purchase price, equity for the remainder — typically produces a more serviceable debt burden and a more flexible operating covenant package than a fully bank-financed deal.
The seller note only functions as designed when the seller is genuinely motivated to see the business succeed after the transition. The clearest signal of that motivation is not what they say about the business. It is how they respond when you push on the things that are genuinely hard about it: the client that accounts for 35 percent of revenue, the manager who has been there twenty years and might leave, the renewal cycle that comes due in month eighteen. A seller who answers those questions without deflection is a seller whose note is worth taking.
For the capital layer above and below the seller note in a typical SME acquisition stack, how private credit fills the financing gap that banks cannot address covers what sits alongside it. And for the broader context on why there is a generation of motivated sellers willing to consider this kind of structure at all, the succession dynamics shaping Southeast Asia’s SME deal environment is where that story starts.
This content is published for informational and educational purposes only. It does not constitute financial advice, investment advice, or a solicitation to invest. Luxry Capital does not manage a public fund and does not make investment recommendations to the public. All views expressed are those of the named author based on publicly available information and personal analysis.
