What is seller financing, you ask? And is it right for me? Seller financing involves a business’ original owner offering a buyer a loan to cover a portion of the price of the business. As the deal closes, the buyer makes a down payment in cash. The seller’s loan covers the remaining amount of the sale price, plus interest (as per the terms set by the lender). Because seller financing rarely covers the entire price of the business, many buyers use another form of financing along with the seller’s loan.
Why do small business owners seek seller financing? There are many entrepreneurs out there that have no intention of starting their own business. Rather, they seek to revamp, modernize and customize an existing business. Seller financing gives them the ability to do so when they cannot find funds elsewhere.
What it Means for the Seller
If you are the party choosing to sell your business with seller financing, the buyer will give you upfront cash. You will then finance the rest of the sale in the form of a loan. Your lawyer will then draw up and file the terms of the loan in a promissory note (essentially a binding IOU).
The repayment terms of seller financing are typically similar to those of a bank loan. Repayment lengths will be anywhere between three and seven years. The repayments will be monthly, and the interest rates will be low (6 to 10%). If you choose to go with seller financing, it is crucial that you require the buyer to put up collateral. This ensures you are in the same position a bank or alternative lender would be, keeping you from being at risk.
The Pros
The biggest benefit of offering seller financing is that your deal will be more attractive to prospective buyers. Most buyers that come to you will not have enough cash on hand to purchase a business outright. In many cases, they will be unable to find financing elsewhere, since banks are still extremely hesitant to lend to small businesses.
The Cons
An obvious downside of using seller financing is the risk involved in personally financing a loan. But this is why it is recommended that you use collateral as a safeguard. In addition, if you hope to have a clean break from your business, seller financing will not be the option for you. You will have to retain a vested interest in the business until the loan agreement is satisfied.
Where to Find Additional Financing
If you think seller financing is right for you but you lack the necessary financing, don’t worry. You don’t have to turn to a bank and risk being turned down. First American Merchant has many flexible business funding options that provide you with the cash on hand you need to take advantage of business opportunities.
A merchant cash advance provides your business with quick access to cash – in as little as 24 hours. You can easily fill out the online application in just a few minutes, and you will hear back in as little as 24 hours. If you would like to learn more about our merchant funding options, contact our team of experts today. We can help you through the application and setup process, so you can get back to your business plans.