Seller financing is when the seller of the business agrees to loan the buyer a portion of the money to complete the purchase. Typically, the buyer signs a promissory note, which includes information about the loan, such as the interest rate, loan term, and more.
It can be very risky for the seller to finance the purchase, so a lot of sellers are hesitant to offer it. They don’t want to have to come back and repo the business if that the buyer stops paying, and they often don’t want to wait to collect the full amount of money.
While acting as the bank can be risky, there are also many benefits to offering seller financing. One of these includes a bigger pool of buyers, because they only have to have the down payment amount to make the purchase. Because there are more buyers interested, the seller is likely going to be able to ask for a higher selling price. Additionally, once a qualified buyer purchases the business, the seller gets to collect interest on top of the normal note payments. Because of the risk involved, most seller financed notes command a premium interest rate, far higher than the seller would get at their local bank.
There are several important things to keep in mind when considering seller financing. It is risky for the seller. Additionally, there is a likelihood that they are going to have to remain involved in the business. When they have substantial capital involved, it is important that the business remain successful, and at times the buyer may need their help.
In order to minimize risk, a seller should check the buyer’s credit score and debt to income ratio, in addition to the businesses ability to pay the loan. If the business can’t support the debt payment, the buyer is less likely to be able to complete the purchase.