Financing Options

Buyer’s have an array of financing options when it comes to buying a business: SBA loan, third-party financing, and Seller financing. Everyone knows SBA loan is taken care of by a SBA loan representative and the business is paid by the bank if a buyer qualifies. Third-partying financing can be generated through home-equity line of credit, family members, retirement funds (i.e. IRA, 401K, 403B), partnerships, etc. What about seller financing? What is it and how does it work?

Seller financing is loosely defined as an agreement to receive part of the purchase price over time, after the closing of a sale. Typical terms of seller financing are 50% down payment at closing, and 50% paid over a certain time (i.e. 3-5 years is standard), with a specified interest rate ranging from 7%-9%, secured against all the assets of the business only.

Seller financing is beneficial to a seller in more ways than one. A seller is more likely to sell a business 2-4 times than a seller that is requesting all cash. Most buyers are attracted to buying business that would give them leverage. This leads to a faster sale, and the seller would avoid wasting months of time demanding all cash. On average, Seller’s who are willing to receive their payment over time will fair out much better than a seller wanting all cash.