Seller Financing: Pros and Cons for Both Parties

When you’re selling your business, finding qualified buyers can be challenging. The pool of prospects may seem limited to entities with quick access to capital. But there may be perfectly suitable buyers who may pay more out there who may not qualify for a traditional loan from a bank. I.e.: a foreign person who is moving to the US and does not yet have citizenship, or an investor that just recently got an SB loan on another business.

Fortunately, there’s a strategy you can use to cast a wider net when you’re selling your business: seller financing. It can bring benefits for both you and the buyer. Here’s a look at the pros and cons of seller financing.

What Is Seller Financing?

In seller financing, the seller is the source of credit rather than a traditional financial institution. After the buyer makes a down payment on the business, the seller loans them the remainder of the price. The buyer makes regular repayments on that loan to the seller with interest.

Pros for the Seller

Offering seller financing can give real advantages to the seller of the business, including the following.

Bigger Pool of Buyers

By including legitimate buyers who can’t raise capital very quickly, the seller expands the pool of potential investors. In turn, the transaction may take less time to complete.

This can be especially helpful if the business is valued more than $5 million, since SBA loans are capped at $5MM. If market conditions are making borrowing money harder for everyone, seller financing is far and away the best option to offer.

New Revenue Stream

By charging interest on the loan, the seller generates a way to earn money even after the business is sold. Interest rates are very high right now so you may be able to get up to 10% interest. They could also see an increase in the loan’s principal value via future interest payments.

More Control Over the Deal

By negotiating directly with the buyer, the seller can set terms and conditions much more easily. They can decide the terms of the loan. They can offer the buyer a deferred schedule where they don’t have to start repayment for, say, two years. Or they could arrange for the buyer to pay 50% now and the remaining 50% on a note.

Tax Advantages

It may be possible for the seller to manage their capital gains over the specified term of the loan. This can help them realize great tax benefits.

Pros for the Buyer

The benefits of seller financing from the buyer’s perspective include the following.

Easier Qualification

A buyer who’s struggling to find outside capital can benefit from seller financing. Sellers may not have the same stringent requirements as mortgage companies or other lenders.

More Negotiable Terms

It’s easier for both parties to reach agreement on the upfront costs, interest rate, payment schedule, length of term, and other factors. They can include structures that can help both sides earn additional revenue.

Cons for Seller and Buyer

While seller financing can benefit both parties, it can also come with distinct disadvantages. Buyers and Sellers should be aware of the following risks.

Risk of Default

Keeping up with regular payments can be a struggle for some buyers. Default may force the seller to try to repossess the business, which can take a while.

Interest Rate Risk

When the parties agree on a locked-in interest rate, future rises or falls in federal interest rates can affect the value of the business. If inflation spikes, the value of the business may decline.

Lower Liquidity and Investment Opportunity

By taking only a portion of the total purchase price up front, a seller may have less capital available to them over time. This could limit their ability to find additional investment opportunities.

Selling Your Business?

Sunbelt Business Brokers helps hundreds of Florida’s small and medium-sized businesses maximize their value. We’ve also helped buyers find the businesses of their dreams by matching them with trustworthy sellers.

Our experts have helped sellers broker the best deals for their situation. We offer several tools for analyzing and evaluating your business, like our free business valuation calculator. We’re dedicated to making Florida’s business environment healthy and making our clients financially successful.

When you’re on the cusp of selling your business, reach out to Sunbelt. Our team will help you move your transaction forward.