Seller Financing; A Flexible Alternative for Small Business Sellers and Buyers
by NicoleD, Former Moderator
- Created: July 9, 2009, 1:38 pm
Seller financing can be a flexible, mutually-beneficial process for both the sellers and buyers in a small business sale, especially when cash or traditional lending is hard to obtain.
The Ins and Outs of Seller Financing
In a business sale transaction, prospective small business buyers can choose to secure financing through bank loans, personal savings, or in some cases, seller financing. In a seller-financed transaction, the seller allows the buyer to put down a portion of the business purchase price, while the remaining balance is secured through a promissory note to the seller.
For example, a business that sells for $350,000 could be structured with a $100,000 down payment from a buyer with $250,000 in seller financing over the course of several years. The promissory note usually would carry an interest rate for the financed amount, in addition to the monthly payment.
Seller-financed transactions are especially common when a cash sale or traditional lending is difficult to come by, and the business doesn’t meet requirements for a venture capital investment. Without the typical intermediaries, flexible terms (payment schedule, loan period, interest rate, etc.) can be worked out based on the unique circumstances of the sale.
How Seller Financing Works for Buyers
Buyers find seller financing attractive because the process indicates that the seller is confident in the business’ ongoing success, since they continue to hold a stake in the venture.
Seller financing often affords buyers the opportunity to purchase a business without jumping through the hoops required to secure a bank loan. Because the terms are worked out between the buyer and seller (usually under the oversight of a business advisor(s)), the terms are flexible and often do not include the fees commonly associated with bank loans. Another plus for buyers is the speed at which a seller finance plan can be set in place, especially compared to more traditional financing routes.
Buyers interested in seller financing should be advised that just because there isn’t a bank or formal institution securing the finance, that doesn’t mean that the contract is any less binding in a legal sense. To ensure that buyers will make good on the scheduled payments, sellers can require a personal guaranty that assures the buyers’ personal assets as collateral.
How Seller Financing Works for Sellers
Sellers also enjoy benefits of a seller-financed arrangement. By offering a desirable financing option to prospective buyers, sellers can often command a better selling price and speedier sale. A seller may also see additional financial advantages through tax breaks and interest accrual.
Seller financing does a pose a risk to the seller, so sellers may not be comfortable considering the terms of a sale until the prospective buyer is audited and security provisions, such as guarantees, are in place.
As an additional layer of security, sellers may choose to place restrictions on how the new owner can manage the business, but this method may not be popular with prospective buyers.
Seller financing is not for everyone. Because the buyer and seller are both invested in a seller-financed transaction, the relationship is often an exercise in compromise. Both parties need the business to thrive and generate profit in order to satisfy their individual financial stakes, so this type of transaction works best when the buyer and seller see eye-to-eye on business operations.
Top Rated Articles
About This Blog
Loans, grants, taxes, and financial tips for your business.