Tweet

As the Banks are tightening lending, Seller financing may be a great option to finance a business acquisition.

Written by: David Dolitsky

Article Overview: 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.

As the Banks are tightening lending, Seller financing may be a great option to finance a business acquisition.

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.

Related Articles
  Quick Guide On Financing Your Business
  Buying An Existing Business Part V of IX
  Benefits of Seller Finance when selling your business
  SMEs grapple with restricted funding access
  5 more seller finance options to consider when selling your business

Article Tags: 3 years, balloon payment, business assets, business buyers, buyers and sellers, capital gains tax, collateral, credit crunch, credit money, equity companies, financial crisis, great solution, interest income, mean time, personal property, pledge, refinances, sba, seller financing, solid experience



Related Forum Posts
Collateral security required - You will have to use your home and anything else you own for collateral on a business loan. The SBA will require you have at least 2 years in the same industry as the business you want to open. Banks will want more money down (30%) and real property as collateral, and will probably charge higher rates and require a 5 year baloon. More and more credit unions are getting into commercial lending and tend to be a little more friendly than banks. Non-bank lenders can offer a nice alternative. They typically require less money down (10% in many cases), rates are usually variable (tied to prime like 2 to 3% above), are more willing to accept equipment as collateral, but expect a shorter term as a trade off for the risk (ie. 5 to 7 year term). This can make it difficult for some to afford the loan payment. Yet another option is a leasing company. There are many leasing companies that will finance franchise purchases and expansions by writing the whole thing up as an equipment lease. (200K) is not out of the question. They might require 10% down, but as long as they have a first position on all the business assets they are quite willing to set you up with a lease. The downside is that your cost of financing (the leasing co. won't call it interest) will be higher than any type of loan. When figuring you cost remember that many states require you to pay sales tax on the amount of your monthly lease payment. Also consider the buy out terms at the end of the lease period. You'll want to stay away from market value buy outs. Go for the $1 buy out. If you have enough equity in your home, you might be better off taking out a home equity loan and using that to finance your business.
Who's best for first time commercial loan? - You will have to use your home and anything else you own for collateral on a business loan. The SBA will require you have at least 2 years in the same industry as the business you want to open. Banks will want more money down (30%) and real property as collateral, and will probably charge higher rates and require a 5 year balloon. More and more credit unions are getting into commercial lending and tend to be a little more friendly than banks. Non-bank lenders can offer a nice alternative. They typically require less money down (10% in many cases), rates are usually variable (tied to prime like 2 to 3% above), are more willing to accept equipment as collateral, but expect a shorter term as a trade off for the risk (i.e. 5 to 7 year term). This can make it difficult for some to afford the loan payment. Yet another option is a leasing company. There are many leasing companies that will finance franchise purchases and expansions by writing the whole thing up as an equipment lease. (200K) Is not out of the question. They might require 10% down, but as long as they have a first position on all the business assets they are quite willing to set you up with a lease. The downside is that your cost of financing (the leasing co. won't call it interest) will be higher than any type of loan. When figuring you cost remember that many states require you to pay sales tax on the amount of your monthly lease payment. Also consider the buy out terms at the end of the lease period. You'll want to stay away from market value buyouts. Go for the $1 buy out. If you have enough equity in your home, you might be better off taking out a home equity loan and using that to finance your business. I hope this helps.
Re: Funding Question - Dianne, Depending on the bank that you're working with, be very, very careful about looking for financing for your marketing or advertising needs. Banks are not willing to finance these expenses in my experience and I was working with the BDC, which looks after government secured small business loans. Even with the lower risk for the BDC (As a large percentage of the loan is backed by the feds), they still required specifics and would not look at financing operating expenses or sales/marketing. [i:1unyjpe9](I noticed after that you're in the US... My experience deals with Canadian lenders so I'm not sure if the criteria is the same in the US market)[/i:1unyjpe9] To Smithwayne... If you're confident in what you're selling and have a sustainable market, don't be afraid of the recession. Look at restructuring your loan as a line of credit and use only what you need. Be very careful with your spending and don't throw money at unproven marketing... in other words, run a tight ship...
Getting financed - It has always been my experience that it will always be better to be in business debt rather than personal debt, but I suppose when you can run your business out of your home and have so little overhead, it could be better to simply finance yourself and secure a business line of credit just in case you need it. On the flip side, when it comes to businesses outside the home, you want to secure financing and SBA is probably the way to go (depending upon what your total project will cost). Banks that provide SBA loan products prefer the loan be 100K or more. Then there are Micro Loans (loans that go up to 35K) and Signature Loans that are unsecured loans and mainly based on your credit score (680 or higher), they can finance anything in between and then some. It's been said in some of my other posts that when you obtain business loans its beneficial because you are building a track record with a lender for future use. Should you get financed via a business loan and later you need additional working capital to keep your business going (or to expand) the lender is going to be more apt to help you because they have already taken on the risk of your loan. Now, they would prefer you better yourself whether it be expansion or to pull yourself out of a hole so you do not default on the 1st loan... and if that means helping you further, believe me they will do it. However, if you finance yourself, who's going to help you with additional working capital if you run into trouble? Lenders won't help you because you financed yourself...they tend to take on the attitude that you didnt need them before, so why now? What if you had originally financed yourslef with home equity and still haven't paid it back...now you have a first mortgage a second or Home Equity line of Credit and your business is in touble and you have no way out.
10 best franchises to get involved - My advice is: 1) Go to the library and start reading business books (accounting, finance, etc.) 2) Go to your local community college and enroll in night classes 3) Join the local Chamber of Commerce 4) Network / Network / Network -- through the above sources. Once you have spent two years doing the above, then look for a 55 - 60 year old business person that is looking to reduce their time in the business. Then you can work on a sweetheart financing option.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

How Many Buckets Do You Need for Retirement?

Ways to Improve Your Landing Page Conversions

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.