Getting a traditional business loan to purchase a business can be tough for would-be buyers who lack a ton of cash or less than stellar credit. Seller financing is one solution to this problem; the business seller acts like a bank and gives the buyer a loan to purchase their business.
Seller financing can be a win/win for both buyers and sellers. Read on to learn more about this popular route to buying the business you’ve always wanted.
Seller financing, also known as ‘owner financing’ or ‘seller carryback’, is commonly used when a business owner wants to sell their business. The seller offers a loan to the buyer to cover part or even all of the sale price and the buyer then pays the seller back in regular instalments. Approximately 90% of small business sales in the UK involve some form of seller financing.
Seller financing can be a good strategy for owners seeking to sell their business as it may open the door to more potential buyers. By self-funding part of the price, the seller takes the weight off the buyer’s need to obtain a large commercial mortgage from a bank or credit union, which can be helpful if the buyer’s credit is weak, they lack the cash to make a big down payment, or their business is relatively new. Seller financing also allows the seller to control the deal, set terms and conditions that are more favourable to them and may help them to obtain a premium on the asking price.
Seller financing functions like a standard commercial mortgage, except the funding is provided by the seller, not a financial institution. The business owner self-finances part of the sale price, effectively providing a private mortgage to the buyer.
Usually, the seller will demand a down payment of at least 10% and will only fund up to 60% of the balance remaining, but terms and conditions can vary significantly depending on the seller’s preferences. Interest rates, repayment dates and other elements of the loan are also custom and arranged on a deal-by-deal basis. In most cases, the buyer will cover the balance of the purchase price (what remains after deducting their down payment and the seller’s financing) with a business loan from a bank, credit union or online lender.
To get a seller financing deal the buyer will usually need good credit and a sizeable down payment, although the seller is free to be as relaxed about these details as they choose. The buyer will also need to give the seller a personal guarantee and in some cases, may have to provide collateral.
Seller financing requires:
Typical seller financing terms:
Top tip: Seller financing deals can be complicated, so it is best to have an attorney draw up the agreement. Additionally, the agreement must be notarised to be legally binding, so it makes sense to conduct the closing at a title company or law office.
Few sellers will self-finance 100% of the sale price of their business, which means after putting in their down payment and taking the seller’s financing, most business buyers will still need to come up with 30% to 50% of the purchase price. Potential business buyers who lack the cash to fill this gap will need to find a business loan to close the deal.
Business loans to complete a financing deal are typically custom deals, shaped to fit the purchase – which means buyers should shop around for different offers before settling on a lender. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will introduce you to a choice of loan deals from different lenders. Some marketplace platforms can also give advice and help you with the application process. This can be especially useful for business buyers who have never taken out a loan to complete a seller financing deal before.
Every seller will have their own criteria for offering seller financing and you won’t know what that is until you ask. However, if your credit is weak and your business is new, many sellers may not want to provide seller financing to you. This means you may have to provide a very large down payment or get a business loan or commercial mortgage from a bank or alternative lender to buy the business.
Commercial lenders – especially those who operate online – may be more flexible in their borrowing criteria than a traditional bank or credit union. Depending on the type of business you are trying to buy and what the sale includes, they may provide you with a loan even if your credit is bad or you’ve been turned down elsewhere. Once again, your unique circumstances will play a major factor in deciding what kind of financing you can get. If you’d like to discuss this with a commercial loan expert before applying for a loan, simply contact Swoop to find out more.
It all comes down to your unique financial situation:
No matter if you’re a buyer seeking funds to complete your first seller financing deal or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for your loan. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality business loans from a choice of lenders. Buy the business you want with confidence. Register with Swoop today.
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