If you are in the market to buy a business, but don’t have a huge amount of cash available to make an all-cash offer, then the option of seller financing may be for you.
What is seller financing? This financing option occurs when a buyer brings a sizable down payment and the seller offers to finance the remaining balance of the purchase price.
Even though the economic picture has vastly improved from where it was a few years ago, many traditional lending institutions are still gun-shy about offering any kind of lending options for small business. Seller financing fills this gap between the all-cash offer and the difficult-to-get traditional financing options, however, the terms of a seller financing deal may have a smaller time period and higher interest rates than traditional lending would.
If you are a buyer who is going to need help with raising capital, there are a few things about the seller’s side of seller financing that you will need to understand and consider.
Most of the time you will need to bring a big down payment. Most (but not all) seller financing is for less than two-thirds of the purchase price, so at the very least a third of the price will need to be given as a down payment at closing. The seller is going to want a fair sized chunk of cash up front because once they sell the business, they are essentially out of a job and will be moving on to perhaps another business venture or retirement.
You will need to prove that you have the ability to keep the business running and profitable long enough to pay back your loan. You will probably have a hard time getting seller financing in an industry where you have little to no experience because a seller doesn’t want your learning curve to affect whether they get paid for their business.
You may have to put up a fair amount of collateral. The business itself we be collateral, in that that seller can take the business back in default. Also, a buyer can offer up personal assets like real estate if they choose to.
If you are someone with terrible credit, you may have a hard time getting seller financing. Any seller in their right mind will want to make sure that you have the ability to pay them back for all of their years of hard work, and a buyer with a good credit score will look far more promising than one without.
The price overall may be a bit higher and the interest rate might be a bit higher too, but what a buyer needs to remember is a seller has no buffer like a traditional lending institution would, this business is all they’ve got. If you have decent credit, a sizable down payment, know what you’re doing in the industry – but just can’t get traditional financing – then seller financing could be a very realistic option. The better you look as a lendee the more business choices will be available.
If this is something you might consider, you need to have the seller financing discussion with your broker early on in the game. This need will drive what businesses you should look at and which ones will be financially out of your league – there are sellers out there who demand an all-cash offer.
Are you a buyer who would be interested in seller financing? Do you have more questions about what information you would have to provide to a seller in order to secure financing? Ask us! Leave a comment or question here, and we will be happy to answer all of your seller financing questions.
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