What is seller financing and how can it help you sell your business?
Seller financing will enable you to attract a broader range of interest and also help smooth out the stressful negotiation process with potential buyers. It is a financing method that benefits both the buyer and seller.
However, there are risks associated with it as with any type of finance. Nevertheless, we will take you through the important factors so you can weigh the overall benefits against those risks.
What is seller finance and how does it work?
Seller finance is a type of loan which you provide to the buyer, which will facilitate the process of sale. It works similarly to a bank loan and the terms of the loans are documented in the legally binding purchase agreement.
Typically, buyers make a deposit which is then followed by monthly repayments at agreed interest rates over a timeline which both parties agree to. If the event of default, you can repossess the business. There are also other ways you can reduce the risk of lending.
What are the benefits of seller finance for buyers?
- More access to financing – Seller financing is a great option for buyers who may not meet the strict financial criteria which banks require. As a result, buyers who have been denied by a bank or a mortgage lender can still purse procuring their dream business.
- Sellers interest in success – Seller who offer seller finance will be interested in the success of business because they would want it do well so that the buyer can pay off the loan. The seller will offer advice and guidance which while not costing them anything will make the chances of success greater.
What are the benefits of seller finance for sellers?
- Attract more interest – You will be able to attract more interest in your business, particularly if you are operating in a competitive sector or if your business has not been performing up to the mark in the recent years.
- Negotiations – Many buyers will want to negotiate to secure a better deal. By offering seller finance you can take some pressure off yourself during the negotiations.
- No third party – If the seller has to get a bank loan, it will increase the number of parties involved in the transaction and the seller can then directly communicate with you regarding finance.
- Quicker process – If the seller has to arrange a mortgage or a bank loan, it will increase the time it will take for the sale to finalise. If you offer seller finance, it will cut down the time required to secure approval for a mortgage or a bank loan.
How to minimise the risk of associated with seller financing?
While offering seller finance seems attractive to both sellers and buyers, there are risks associated with it which you need to think about. One way of mitigating the risks is by charging a higher interest rate as compared to other lenders.
Further, you want to carry out robust due diligence with regards to your buyer’s financial power, business background, and the likelihood of their making the business a success.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
We would love to hear what you think about this article and how we could improve it. Please do let us know. However, we shan't be able to reply to your specific questions. If you have a question about a document, please contact us.
If you have noticed a bug or a mistake on this page, or just want to give us feedback, we'd love to know. Nothing is too small or too big. Send your message on this feedback page.