Seller financing

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Page written by Chris Godfrey. Last reviewed on February 2, 2024. Next review due October 1, 2025.

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.

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What is seller financing?

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 US 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 favorable to them and may help them to obtain a premium on the asking price.

How does seller financing work?

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.

Seller financing in practice

To get a seller financing deal the buyer will usually need good credit (FICO 680+) 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. This could mean the seller taking a UCC-1 lien over the buyer’s business assets – machinery, vehicles, etc.

Seller financing requires:

An asset purchase agreement between the seller and buyer. This sets out the terms and conditions of the sale and any seller-financing that is provided.
A promissory note signed by the buyer.
A personal guarantee signed by the buyer.
A UCC-1 lien on the buyer’s assets taken by the seller (optional).

Typical seller financing terms:

Loan amount: Between 5% and 60% of the sale price. In rare cases, the seller may offer financing for 100% of the balance of the sale price if a bigger down payment is offered (15% – 20%).
Down payment: 10%
Term length: 5 to 7 years.
Interest rate: 6% to 10% p.a.

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 notarized to be legally binding, so it makes sense to conduct the closing at a title company or law office.

Seller financing pros and cons for buyers

Pros:

Increases options to buy: If the buyer cannot secure a traditional bank loan to buy the business, seller financing may give the buyer sufficient funding to close the deal.
Provides confidence: If the seller is prepared to offer seller financing, the buyer can assume the seller is confident that the business will generate enough cash flow to pay back the loan.
Higher return on investment: Buyers get a higher return on investment from a cash-on-cash standpoint with seller financing. The seller’s loan allows the buyer to retain more cash to invest elsewhere.

Cons:

Pay a higher price: To gain the seller’s loan, the buyer may need to pay top price or more for the business, whereas if they had finance from a commercial lender they may be able to negotiate a lower price.
Higher interest: Seller financing can come with higher interest rates than funding from a commercial lender.

Seller financing pros and cons for sellers

Pros:

More potential buyers: Seller-financing can open the door to buyers who may be unable to get a large loan from a bank. This means more potential buyers and possibly a higher sale price.
Sell at or above asking price: Seller financing allows buyers to consider businesses with a higher asking price. This may give the seller the opportunity to sell at or above their asking price and avoid having to give a seller discount.
Tax advantages: Seller financing is classed as an instalment sale. The seller only pays capital gains tax on the instalments they receive in each tax year, allowing them to spread the tax burden over the term of the contract.

Cons:

Missed opportunities: Because the seller does not receive all of the sale price for their business immediately, they do not have as much cash available to invest in other investments.
Risk: If the buyer defaults on the loan and the seller doesn’t have the proper protections in place, the seller will lose that money with no ability to recoup the loss. Additionally, if the business doesn’t do well after the sale, the situation may require a lien or a clawback, and then the seller would have to run the business despite getting out of it. Lastly, if the buyer profoundly mismanaged the business, the seller would then have to go through a foreclosure.

How to find additional funding to complete a seller financing deal

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.

Do I qualify for seller financing?

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.

How do I know if seller financing is right for me?

It all comes down to your unique financial situation:

Buyer: If you are struggling to secure a large loan from a commercial lender but you are certain you want to buy the business, seller financing may be a good fit for you. Keep in mind that you will usually have less room to negotiate the purchase price if you take the seller’s deal – and you may end up paying more in interest charges than you would with a loan from a bank.
Seller: If you’re in no hurry to collect all the value from your business and you want to gain a tax advantage, seller financing may be the way to go. You will probably get a better sale price by providing seller financing and you will gain added income from the interest you charge the buyer. However, don’t forget the drag of inflation which will reduce the value of the sale price over the length of the contract and the inherent risks you carry by providing a business loan.

Get started with Swoop

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.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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