How To Use Seller Financing for Business

Seller financing is when the owner of the business (the seller) offers the buyer a loan to cover part of the price of the business. The buyer makes a cash down payment when the deal is closed. The seller’s loan covers the remaining amount of the sale price and the buyer repays in regular installments plus interest. Seller financing does not cover the entire price, so the buyer uses another type of financing with the seller’s loan. Here we will discuss how seller financing works and its benefits and disadvantages.

How Does Seller Financing Work?

An owner will extend a loan for a part of the sale price which is about 30% to 60% while the buyers pays cash up front. The seller will determine the creditworthiness of the buyer just like a lender does, and will ask for financial documentation, business plan, and other information needed to help determine if the buyer is going to be able to deliver.

Repayment terms are similar to those of a traditional business bank loan which lengths been between three and seven years with low interest rates. As the seller, you will want to have the buyer put up collateral in case the buyer defaults on payments. Collateral always helps lessen the risk no matter what other type of financing is being used. Sometimes the seller will require additional collateral, such as a personal guarantee.

The Pros and Cons of Selling Your Business with Seller Financing

A benefit of seller financing is that it is attractive to buyers because often times buyers do not have the upfront cash required to purchase a business outright and banks and lenders are hesitant to give out funds for business acquisition.

As a seller, you will have a lot of people interested in sell financing and the process can be faster rather than dealing with a bank or other lenders.

The biggest disadvantage for business owners that are considering seller financing is the risk involved, luckily collateral can be used as a safety measure against it. It also requires the owner of the business to be invested until the buyer gets through the loan agreement and the sale is made.

The seller will receive the sale of business in installments so there will be less capital to invest in another place. Besides collecting collateral, the seller can add the following terms to the agreement:

  • Down payment
  • Control of business with non-payment clause
  • Collateral
  • Personal guarantees

What You Need to Look for in a Buyer

It might seem scary to think about lending a ton of money to someone you do not know, and it requires some trust. There are some qualifications you can look out for when you are going through buyer applications to help you choose the right people to lend your money to.

  • Experience in your industry: to show that the buyer is qualified, they need to show proof of experience in the industry. They can write a short cover letter that explains why they are eligible for your loan and why they should take over your company.
  • A business plan: a well thought out business plan is also helpful. It should include the goals, how they will achieve those goals, and their vision.
  • Clean financial history: reviewing the buyer’s financial history will give you an insight to see if they are trustworthy. Someone with a poor financial history might not be able to repay their debts in full and on time.

The Bottom Line

After considering the information about seller financing and you decide it is right for you, be sure to consult with a team of professionals to help you through the process and help you with incoming offers.