Pros and cons of seller financing

On Behalf of | Jan 20, 2022 | purchase and sale agreements | 0 comments

When purchasing a business, different financing options are typically available. You may opt to secure a loan from your bank. However, there are also other options you may want to pursue, like seller financing.

About seller financing for your business

According to Business.com, seller financing occurs when the seller of a property or a business provides the financing for the purchase. Instead of paying off a bank loan, you pay back a loan provided by the seller. You negotiate directly with your seller over your payment terms, including the interest you will pay and the payment schedule.

The benefits of seller financing

Seller financing is beneficial for a number of reasons. When purchasing a business, seller financing often allows you to take ownership more quickly than if you made the purchase through outside financing. This also gives you speedier access to other assets like the seller’s list and goodwill of the business.

In addition, you stand a better chance of keeping the financing arrangement private if you negotiate with the seller directly. You may also secure better loan requirements and end up with more flexible interest rates.

The downsides of seller financing

There are also downsides to seller financing. If you purchase a business, you may have to divert a portion of your business profits to make your monthly payments to the balance. Also, seller financing periods tend to be shorter than conventional bank loans. As such, you may face a balloon payment in the near future. The payment could be substantial, depending on how much you owe when the balloon payment comes due.

The risks of seller financing may not add up to much more than what you might face if you acquired your financing from a traditional lender. Since business purchases take many forms, consider consulting with a business law attorney who can help you look at this option and others that best fit your financial situation.