What is Seller Financing and Should Your Business Consider It?
As with any venture, though, there are benefits and drawbacks to seller financing. While it might be fast, it could also be more expensive, even if it seems like a better deal in the short run. Regardless, you won’t know if you should consider this type of financing until you understand how it works and how it could benefit your business. In this article, we’ll explain what seller financing is and will provide tips on how you can decide if it’s the right financial venture for you.
What is Seller Financing?
Seller financing is generally structured similarly to a traditional loan. For example, when using seller financing, you’ll make periodic principal and interest payments, just like you would when paying off traditional financing. However, instead of borrowing money from a lender, you’ll be borrowing money from the seller of the business you’re buying.
Why Should You Consider Seller Financing?
1. Cheaper Financing
It’s important to note that seller financing isn’t always cheaper. Although you’ll avoid some closing costs, a higher interest rate could eat into those savings in the long run. That said, depending on the terms of your deal, seller financing can be much cheaper than alternatives.
2. Quick Closing
If you need capital to get a deal finalized — assuming the seller is willing — there are few faster ways to raise that capital than seller financing. With a traditional lender, you’ll have to gather your documents, apply, and wait for approval. Even then, you’ll have to wait for the loan to close.
With seller financing, the lender is the owner of the business you’re buying. That means they’re incentivized to close quickly, and they don’t have as many regulatory and procedural hoops to jump through.
3. Easy Access
If the seller agrees, this type of financing is accessible even for people with poor credit. Still, anyone who’s offering seller financing will evaluate your ability to repay their loan before starting the financing process. That means they’ll check your credit score, verify your business history, and consider your track record.
4. A Flexible Solution
As mentioned earlier, the terms of seller financing deals will vary considerably. This can make things complicated because there are so many options, but it also gives you flexibility.
For example, you could use this financing option to cover just 10 or 20 percent of the purchase price. Or, maybe you can’t agree with the seller on price. In this scenario, you might concede and pay the seller’s price on the condition that they’re willing to finance part of the deal.
The point is, seller financing allows you to get very creative to ensure a deal gets done.
Evaluating on a Case-by-Case Basis
Deciding on whether to use seller financing isn’t black and white. You’re dealing with individual sellers and not financial institutions, so there’s going to be much more variation in the terms and financing structure.
In addition, individual sellers have different incentives. Just like a traditional lender, they want assurance that you’ll repay your loan, but they also want to sell their business. If they’re struggling to find a buyer, you may be able to negotiate more favorable terms and get cheaper, quicker financing. In fact, during the Great Recession, seller financing became essential to closing deals because buyers had so little capital.
On the other hand, if the owner has plenty of interested buyers, you’re less likely to get a good deal on seller financing.
Conclusion: Is Seller Financing Right for Your Business?
At the end of the day, there’s no harm in considering seller financing. You should consider this financing option the same way you should shop around anytime you’re looking for a loan. If there’s a better deal to be had through seller financing, it may be the right decision.
However, it’s important to know that taking out seller financing means you’re dealing with individuals. Unlike traditional lenders, individual owners aren’t closely regulated. Be sure to do your due diligence on the financing arrangements and evaluate the deal on a case-by-case basis to make the best decision for your business.
Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2019.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.