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Understanding Seller Financing

small business loan cartoonSince the downturn of the economy that started to take effect in late 2008, banks have become increasingly difficult to work with and most businesses that we have sold in the past few years have had some sort of seller financing, whether at the bank's request, or the buyer's, or both.  Gone are the days when banks routinely approved “goodwill financing” as lenders are much more interested in financing tangible, rather than such intangible attributes as brand perception, customer loyalty or employee happiness.  While those things are important for any business, banks are looking to finance concrete numbers only.  Seller financing can be a flexible, mutually-beneficial process for both the sellers and buyers in a small business sale, especially when cash or traditional lending is hard to obtain.

Buyers find seller financing attractive because the process indicates that the seller is confident in the business's ongoing success, since they continue to hold a stake in the venture.  Buyers interested in seller financing should be advised that just because there isn’t a bank or formal institution securing the finance, that doesn’t mean that the contract is any less binding in a legal sense.  To ensure that buyers will make good on the scheduled payments, sellers can require a personal guaranty that assures the buyer's personal assets as collateral.

Sellers also enjoy benefits of a seller-financed arrangement.  By offering a desirable financing option to prospective buyers, sellers can often command a better selling price and speedier sale.  In fact, statistics have shown that seller financed deals typically have a 15% higher sales price than those that are commercially financed.  A seller may also see additional financial advantages through tax breaks and interest accrual.

Obviously, there are no guarantees that the buyer will be successful in operating the business. However, it is well to note that, in most transactions, buyers are putting a substantial amount of personal cash on the line--in many cases, their entire capital. Although this investment doesn't insure success, it does mean that the buyer will work hard to support such a commitment.