Nothing in Canadian law tells a seller what interest rate to charge on a vendor take-back note. The rate is a negotiation, bounded on one side by what a buyer's cash flow can actually service and, on the other, by a single hard statutory ceiling almost no real deal comes close to.
Key takeaways
Before any negotiation starts, one number is fixed by federal criminal law rather than by the deal: the criminal rate is defined as “an annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 35 per cent on the credit advanced.” That definition applies to any person entering an agreement or arrangement to advance credit — it is not carved out for private business loans between two commercial parties, and there is no exemption in the statute for a vendor take-back note specifically. In practice this ceiling almost never binds a real vendor note, because published market rates sit far below it, but it is the outer legal limit any drafted rate has to respect.
The Canada Small Business Financing Program caps what a participating lender can charge on a government-guaranteed acquisition loan: the maximum chargeable is the lender's prime lending rate plus 3% for a term loan, or prime plus 5% for a line of credit. That cap governs the lender's side of a financing stack, not a vendor's — and, separately, the CSBFP cannot finance a share purchase at all, a limit developed in why vendors finance part of their own sale. It is nonetheless a useful reference point: it is the only rate ceiling in this space that is actually published by a Canadian government authority, and it puts the deavo vendor-note range below in some perspective.
The most specific published Canadian figure for vendor take-back pricing comes from deavo's own capital-stack tool: on smaller deals, seller financing typically runs about 15% of the purchase price (10–20% common), over a 3–5 year term. That figure carries deavo's own disclaimer — “an illustrative estimate only, never a financing offer, pre-approval, or financial advice” — and describes the size of the VTB piece and its term, not a specific interest rate for it. No source in this environment publishes a Canadian market interest-rate figure for a vendor note specifically; deavo's number describes the amount financed and the term, not the coupon on it.
On mid-market deals, deavo's tool shows sellers increasingly rolling equity forward instead of taking a note — about 5% seller rollover, where the seller keeps equity in the new company rather than a fixed-rate receivable — a structurally different way of financing part of the deal that carries investment risk instead of credit risk.
A seller offering a VTB is not simply lending money at whatever rate the market will bear — a seller offering a take-back may expect a higher price or fewer other concessions in exchange. In other words, the interest rate on the note is one variable in a package that also includes the headline purchase price, the security taken (see collateral a seller can register against the buyer), and how subordinated the note ends up being to the buyer's bank. A below-market rate on the note paired with a higher price and stronger security can leave a seller better off overall than a market-rate note with weaker protection.
A note tied to prime plus a spread moves with the Bank of Canada's rate cycle and mirrors how the CSBFP itself is priced; a fixed rate gives the seller certainty regardless of what happens to interest rates over the note's term, at the cost of possibly under-pricing the risk if rates rise. Either way, where a bank is financing part of the same deal, the seller's note is typically subordinated through a standstill agreement — and a deeply subordinated position is itself a reason to negotiate for a higher rate, since the seller is absorbing more risk than the face security suggests.
The rate a seller can actually collect is bounded, in practice, by what the business can service on top of its senior debt. Deavo's published capital-stack tool prices its own debt sizing against a debt-service coverage ratio target of at least 1.25× on SDE-based lending for smaller deals, and at least 1.30× on EBITDA-based lending as deals get larger — meaning the business needs to generate meaningfully more free cash flow than its total debt service, senior and vendor combined, before a lender is comfortable and before the vendor note is realistically serviceable. A seller negotiating a rate that pushes total debt service past what the business can support at that coverage level is negotiating a number that looks good on paper and is more likely to end in the default scenario covered in what happens if a buyer defaults on a seller note, not a number the buyer can actually pay. This is also why a buyer's senior lender reviews the proposed VTB rate and term as part of underwriting the rest of the deal, rather than treating it as the seller's business alone.
A seller finances $300,000 of a $1,000,000 sale price through a four-year vendor note, sitting inside deavo's published 10–20% VTB band as a share of price. Two structures are compared: a fixed rate of 10%, and a variable rate of prime plus 2%.
At a fixed 10%, the seller knows exactly what the note pays regardless of what happens to interest rates over the four years. At prime plus 2%, the payments move with the Bank of Canada's policy rate — higher if rates rise from where they were at signing, lower if they fall — which shifts interest-rate risk onto the buyer's debt-service capacity rather than fixing it for the seller.
Neither structure comes close to the 35% APR line in the Criminal Code, which is the point: the criminal rate is a backstop against genuinely abusive lending, not a factor in how an ordinary vendor note gets priced in the market described above.
Before settling on either structure, the buyer's advisor models total annual debt service — senior loan payments plus the vendor note payments at each candidate rate — against the business's historical free cash flow. At 10% fixed, the combined coverage clears the lender's threshold comfortably; at a stress-tested higher variable rate, it does not. That single check is what actually disciplines the negotiation, more than any statutory ceiling: a rate the business cannot service is a rate that produces a default regardless of what the note document says.
Yes: the Criminal Code sets the criminal rate at an annual percentage rate exceeding 35% on credit advanced, applying broadly to agreements for advancing credit. Almost no real vendor note approaches this figure — published market ranges sit well below it — but it is the outer legal boundary.
Either is used in practice. A fixed rate gives the seller payment certainty; a prime-based rate shifts interest-rate movement risk onto the note's cash flows over its term. The choice is a negotiation, not a legal requirement, and should be weighed alongside the note's security and subordination position.
No. The CSBFP's prime-plus-3% (term) and prime-plus-5% (line of credit) caps govern what a participating financial institution can charge on a government-guaranteed loan, not what a private seller can charge on its own note. It is a useful reference point, not a legal ceiling on vendor financing.
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