One of the quickest ways to obtain a significant amount of capital to buy a business is to do it through seller financing. There are benefits and drawbacks to seller financing. It is fast but can be more expensive, even if it seems like a good deal. However, you will not know if you should consider this type of financing until you understand how it works and how it can benefit your business.
In this article, we will explain what seller financing is and will provide tips on how you can decide if it is the right venture for you.
What is Seller Financing?
Seller financing is generally structured to a traditional loan. When using seller financing, you will make periodic principal and interest payments, just like you would be when paying off traditional financing. However, you will be borrowing money from the seller of the business you are buying, instead of borrowing from the lender.
Seller financing is not always cheaper. You will avoid some closing costs; a higher interest rate could eat into those savings in the long run. That said, depending on the terms of your deal, seller financing can be cheaper than alternatives.
If you need capital to get a deal finalized there are some faster ways to raise that capital than seller financing. With a traditional lender, you will have to gather your documents, apply, and wait for approval. Even then, you will have to wait for the loan to close.
With seller financing, the lender is the owner of the business you are buying. It means they are incentivized to close quickly, and they do not have as many regulations or procedures to go through.
If the seller agrees, this type of financing is accessible to those who have poor credit. But you still will be evaluated to see if you are able to repay your loan. This means your credit score, business history, and track record will be checked.
The terms of seller financing deal varies, which can make it complicated because there are so many options but it gives you flexibility.
You could use this financing option to cover 10 percent of the purchase price. In another scenario, maybe you cannot agree with the price. The point is, seller financing allows you to be flexible and be creative to ensure a deal gets done.
Evaluating on a Case-by-Case Basis
Deciding on whether to use seller financing is not black and white. You are dealing with individual sellers and not financial institutions, so there is going to be much more variation in the terms and financing structure.
Individual sellers have different incentives. Just like a traditional lender, they want to assure that you will repay your loan but also want to sell their business. if the owner has interested buyers, you are less likely to get a good deal on seller financing.
The Bottom Line
There is no harm in considering seller financing at the end of the day. Consider this option the same way you should shop around anytime you are looking for a loan.