If you don’t qualify for a traditional bank loan or if you’re a little short on cash, don’t let that stop you from buying a business. Many sellers will help you finance the purchase of their business. Borrowing 10, 20 or even 30 percent from a seller at a competitive rate can be a much better alternative to using your credit card or obtaining a high interest unsecured loan.
Here’s 4 things you should know regarding seller financing:
Seller financing can be used to bridge the gap in negotiations. Sometimes seller financing can bridge the gap if you and the owner can’t agree on a price. If a buyer is wants to offer less than the asking price, but the seller won’t go down in price, sometimes the seller is willing to finance the difference to close the deal. In this instance, both parties win.
Seller financing comes with its requirements. Sellers will often expect you to meet certain requirements before they are willing to offer financing. You should have experience in their industry, a solid business plan, working capital and roots in the community. The may also require you to pass a credit check, have collateral and life insurance. Loan terms include interest rates comparable to banks and can extend up to 10 years.
The business should meet your expectations. It’s important to do a thorough due diligence buying any business. Scour the financials, including bank statements, cash flow, P&L and tax returns. Make an assessment of the property, equipment and other assets. Have an experienced business attorney at your side. If you suspect the seller is hiding something, this is a red flag and a good time to back out of the deal.
Negotiating on your terms. Sellers don’t always advertise that they are willing to carry some of the financing, but it’s quite common when they’re motivated to closing the deal. This is a negotiation between buyer and seller, and a good opportunity for you to get creative on the terms of the purchase agreement.
“A look at when seller financing makes sense and how to vet the deal.”