What Are Typical Seller Financing Terms, and Why It Should Be Considered

Seller reviewing paperwork: Professional Business Appraisal Consultants

Selling your business in today’s economic climate can prove to be a challenge. In many cases, including some form of seller financing is the only way to complete the sale.

That could be good news for you. Let’s take a look at how seller financing usually works (and how it can benefit you as a seller).

What Is Seller Financing?

With a typical business loan, the purchase price is mostly fronted by the bank, to which the buyer makes regular monthly payments. Seller financing works similarly, with the seller functioning as the bank.

A buyer gives the seller a down payment and then pays back the rest of the loan (plus interest) in monthly installments.

Seller financing is not a new concept. However, many buyers are having trouble financing a business with only a bank loan. Banks and buyers have begun to expect some level of seller financing to close a deal, so it’s becoming increasingly common.

Using Seller Financing in Addition to a Bank Loan

So why not finance the entire purchase with a single bank loan? The answer often comes down to maximum loan limits. Many business loans for small businesses come from Preferred lenders which are backstopped by the Small Business Administration (SBA).

However, SBA loans cannot exceed $5 million. If you’re selling your business for slightly more and your buyer has been approved for the maximum SBA loan, it’s worth considering financing the rest of the sale yourself.

Sometimes, a buyer has a good credit score, but they might not qualify for enough money to complete the purchase price. In this case, they might be approved for a relatively small bank loan. If you’re selling your business and know the buyer can afford to repay the full sale price with interest, it might be wise to offer to finance the portion of the purchase price the bank loan doesn’t cover.

How Seller Financing Benefits Both Buyer and Seller

In many cases, seller financing proves to be a win-win for both parties. Buyers get access to the money they need to buy a business. And for sellers, there’s a whole host of benefits:

Higher Interest Rates

Some buyers look for seller financing because they don’t qualify for a bank loan. In this case, you can offer financing at a higher interest rate — seller-financed loans may have interest rates of 10% or more if there is no bank loan at all. If you offer a seller note behind the bank SBA loan, you should expect a slightly lower interest rate.

Having First Lien on the Business

With traditional bank loans, the bank gets first lien if the buyer defaults on a loan. However, if you finance the sale yourself, you have first rights to the business’s assets if the buyer can’t pay.

Ability to Offer Short or Long Loan Terms

If you’re selling your business and financing the sale yourself, you have the freedom to set your own loan terms. Often, the buyer and seller work together to decide on a loan term that works for both of them.

Ability to Keep Some Equity

When you offer seller financing, you can keep some equity in the business over the life of the loan. This is a great hedge; in some cases, it even enables you to draw a salary without being directly involved in business operations.

Fast Closing

If you’re more than ready to move on to the next stage of your life, you’re probably hoping for a quick closing process. Seller-financed sales can close incredibly quickly because they move at your pace, not the bank’s.

Thinking About Selling Your Business?

Selling your business can be daunting, but the team at Sunbelt Business Brokers is ready to help. Our experienced brokers specialize in connecting small- and medium-sized business owners with eager buyers. We understand that the logistics of business sales are often more intricate than they appear, so we make sure we’re with you every step of the way.

Whether you’re ready to sell or are just considering doing so, check out our fast, free business valuation calculator. If you want to learn more about selling a business or working with us, please don’t hesitate to contact us today.