Since the start of the financial crisis last year, banks have stopped extending credit for virtually any loans including SBA type loans.  It is very difficult for business buyers to get approved for financing, even buyers who have excellent credit, money down and collateral, which are the three major requirements.  Of course this environment won’t last, but in the mean time there is a solution for both buyers and sellers and that is Seller Financing.

Seller financing is when the seller of the business acts as the bank and extends a note to the buyer of the business.  There are several advantages and disadvantages for both buyer and seller, however if done properly, it’s a great solution to the financial crisis of today.

Here is how it works.  The buyer of the business puts down a down payment, ideally 30-50% of the agreed sales price and the balance is financed by the seller, typically for 2-3 years at agreed interest rate.  In order to reduce the monthly payment, the loan could be amortized over a longer period of time.  At the end of the term, a balloon payment is due to the seller, at which point the buyer either pays off the loan, or refinances with a bank.  It should be easier to refinance at that time.  First of all the credit crunch should be over, second the buyer has owned the business for 2-3 years, which gives him a solid experience in the business, and third they are refinancing a smaller amount.  The note can be secured by the business, the business assets, personal property or anything else the buyer is willing to pledge and the seller is willing to accept. 

The advantages to the seller are; the business can sell quickly, they can earn interest income, get a bigger sales price for the business, postpone capital gains tax or sell the note to equity companies.  The disadvantages are: they don’t get all the money upfront, they run a risk of the buyer defaulting on the note, and they continue to be involved in the business indirectly.

The advantages to the buyer are; ability to buy a business, having owners participation and input, more leverage.  The disadvantages are: having to pay higher interest rate for the term of the loan, higher down payment than most SBA loans require.

I have many creative ways of financing a business and in today’s economic and financial environment, my creativity is being pushed to the limit, but the most important thing to remember, is that there is always a way to finance a deal as long as both parties are willing to keep an open mind, compromise, and achieve the common goal.