seller financing

After the recession of 2008, gone are the days of potential buyers having easy access to find capital to fund a business. Lending restrictions by banks have put a stop to that. Because it’s so difficult for potential buyers today to obtain financing through traditional lenders, they may need assistance with the purchase of your business.

The most popular choice is seller financing — a win-win for both buyer and seller. Your willingness to offer seller financing right out of the gate will encourage even more eager, potential buyers able to meet your asking price and you will get a deal done that much faster.

How It Works

The way seller financing works is when the seller of a business provides a loan to the new buyer to cover a portion of the purchase price. Here’s an example: Let’s say the sale price for a business is $500,000. A seller financing deal would require a down payment of, say, $200,000 from the buyer, and $300,000 in owner financing.

The terms of the loan payment are generally quite flexible and can vary greatly, but typically are 3-7 years with interest rates ranging from 6%-10%. (Obviously, as a seller you want to make the most money possible, but it isn’t beneficial to have unrealistic terms that could lead to a default.) It’s normal to have monthly payments start 30 days from the date of the sale… unless, of course, those terms are modified to accommodate seasonality of business revenue.

Over the course of the loan, you will receive interest income above and beyond what the actual sale price was. And by spreading this income out, your taxable income is spread out as well.

Understanding the Risks

With the ease of seller financing you might be wondering why it’s not always offered. Well, it is… almost. Seller financing is involved in up to 90 percent of small business sales. The other 10% of sellers avoid offering financing out of fear that the buyer won’t be successful and won’t be able to make payments, forcing them to have to take back the business or forfeit the balance of a note.

While this is a logical fear, it’s important for sellers to remember that buyers have put so much on the line — sometimes their entire capital — that they’ll do all they can to avoid that happening. They want to succeed just as much as you want them to.

All businesses are unique and their sales need to reflect that. Seller financing is far too complicated to handle yourself, so enlist the services of your business broker or a qualified financial adviser to get creative with financing that makes the most sense your both you and the buyer.