Buying a business requires lender resources or a good deal of capital. A large percentage of buyers don’t have the lender resources or the necessary capital to pay cash. This is where seller financing comes into play. Seller financing is quite common. Here are some key points to remember.
Is Seller Financing a Good Idea?
A seller’s reluctance to provide seller financing is a “red flag” to many buyers. Many buyers feel that if a business is truly as good as the seller claims, then providing financing shouldn’t be a “scary” proposition. In reality, this notion does carry some weight. Sellers are concerned that the buyer will be unsuccessful, and this is the primary reason that many sellers are reluctant to provide seller financing. This means that if the buyer fails to make payments, the seller could be forced to take the business back or even forfeit the balance of the note.
It is important for sellers to look at the facts. Sellers who sell for all cash receive approximately 70% of the asking price. When sellers offer terms, they receive approximately 86% of the asking price.
Benefits Of Seller Financing
Here are a few of the most important benefits associated with seller financing: the seller receives a considerably higher price, the interest on a seller-financed deal will add significantly to the actual selling price, sellers can get a much higher interest rate from a buyer than they can get from a financial institution, there are tax benefits to seller financing versus an all-cash sale and, financing the sale serves as a vote of confidence in the buyer.
There are no guarantees that the buyer will be successful in operating the business. It is important for sellers to remember that in most situations the buyers are putting a large percentage of their personal wealth into the purchase of the business. The buyer is heavily invested even if financing is involved.
Business brokers excel in helping buyers and sellers discover creative ways to finance the sale of a business. Your broker can recommend a range of payment options and plans that can, in the end, often make the difference between a successful sale and failure.