- Community Home
- :
- Expert Insight and News
- :
- Loans & Grants Advisor
- :
- Seller Financing – A Flexible Alternative for Smal...
Seller Financing – A Flexible Alternativ e for Small Business Sellers and Buyers
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.
Exercising Compromise
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.
Related Resources
-
JamieD
- Hello! My name is Jamie. I'm a consultant for the U.S. Government and have been supporting the Business Gateway program for the last year. I look forward to hearing the concerns and advice you all have to offer our small business community!
-
BobK
- My name is Bob Keating. I'm a consultant working on the Business Gateway program for the U.S. Government. I provide product strategy and develop new features and content for the site. I am very interested in hearing your ideas about how Business.gov can better serve the needs of small business owners.
- Business Line of Credit (1)
- Business Loan (1)
- grants (1)
- Venture Capital (1)
- The Six Steps to Buying A Bankrupt Business
-
Bookkeepin
g Basics for Small Business - Our Plans to Expand the Loans & Grants Advisor
- The Fine Print: Business Loan Terms
- How Much is My Business Worth?
- I'm Applying for a Loan. How Do I Know if I Have E...
-
I know My Personal Credit Score...Bu
t What about M... -
Seller Financing – A Flexible Alternativ
e for Smal... - A Quick Guide to Microloans
-
Community Developmen
t Block Grants - How Do They B...
- jimb12345 on: A Quick Guide to Microloans
-
clouttech
on:
Grants.gov – What’s in it for Businesses
? - samueljaxon on: Venture Capital & Equity Capital Programs
- robert007 on: Applying for a Business Line of Credit
- investgreene on: Loans for Business Owners with Poor Credit Scores
- investgreene on: Green Tax Incentives
-
samueljaxon
on:
Financing for Women and Minority Entreprene
urs - rashoodollison on: Child Care Industry Loans and Grants
- croatia on: Government Grant Scams
- JoeGamer on: The Recovery Act and Your Small Business
- 16/08/2009 - 22/08/2009
- 09/08/2009 - 15/08/2009
- 02/08/2009 - 08/08/2009
- 26/07/2009 - 01/08/2009
- 19/07/2009 - 25/07/2009
- 12/07/2009 - 18/07/2009
- 05/07/2009 - 11/07/2009
- 28/06/2009 - 04/07/2009
- 21/06/2009 - 27/06/2009
- 14/06/2009 - 20/06/2009
- 07/06/2009 - 13/06/2009
- 31/05/2009 - 06/06/2009
- View Complete Archives
User | Kudos Count |
---|---|
rainmaker1 | 10 |
CosmicRabbit | 3 |
BusinessWoman | 1 |
akespass | 1 |