Seller financing, also known as owner financing, is an arrangement in which a business owner loans the new buyer money to finance the purchase of the business.
This method allows the buyer to repay the seller over a set period of time, rather than forcing the buyer to front the money or take out a traditional bank loan.
Advantages of seller financing
Seller financing is one of the best ways to take ownership of a business for a number of different reasons.
For buyers, seller financing
- allows you to own, operate and manage a business without investing a large sum of money;
- provides access to a large amount of capital; and
- usually offers a lower interest rate when compared a loan from a lender.
Additionally, if you decide to pursue a small business loan down the road, your likelihood of approval increases after a successful seller financing deal because it encourages your trustworthiness with the lender.
From the business owner’s perspective, seller financing is a very attractive option when looking to quickly and seamlessly implement an exit plan. Benefits to the seller include
- the ability to attract more buyers; and
- receiving a consistent paycheck with interest throughout the duration of the sale.
A major benefit for both sellers and buyers is that seller financing expedites the overall sale process, allowing the seller to plunge into entrepreneurship while alleviating the responsibilities from the business owner.
Common terms to seller financing agreements
Every seller will have different goals and expectations when they decide to sell their business. However, as a buyer, there are general rates and conditions that you should anticipate during negotiations, including
- Most sellers will finance 30-60% of the purchase price.
- The average interest rate range is 6-10%.
- The term length can last anywhere from five to 10 years.
- Sellers may create terms to take back control of the business if payments are missed.
In some cases, you may find a seller who is willing to finance the full purchase price, especially if traditional lenders don’t typically offer loans for that type of business.
A major benefit for both sellers and buyers is that seller financing expedites the overall sale process, allowing the seller to plunge into entrepreneurship while alleviating the responsibilities from the business owner.
Attractive qualities in a buyer
In a seller financing agreement, business owners have a continued financial interest in the business. This means that the perfect buyer candidate has to come with qualities that foster responsibility and trust.
Before signing a seller financing https://co-admin.uschamber.com/cms/entries/coSection/new#agreement, the seller will look for a buyer who checks the following five items:
Industry experience and skill. A seller doesn’t want to hedge their bets on a buyer with little to no experience in the industry. Buyers should prepare to illustrate their individual expertise pertaining to the existing business.
A solid business plan. A business model is necessary for all businesses, and a detailed plan will help the seller foresee the buyer’s success.
Good credit history. The buyer’s credit score is the primary indication of borrower potential. If there is a personal relationship between the buyer and the seller, financing may be secured with a sub-prime credit score, but most times lenders will look for a credit score of about 650.
A significant down payment. Many sellers will ask for a substantial down payment before they turn over the business to the buyer.
A collateral agreement. In addition to a down payment, some sellers may ask for collateral in the form of a blanket lien. A blanket lien gives the seller the right to seize the business’s assets to pay off debt if the borrower defaults on the loan.
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