May 10, 2019
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.