When you decide to sell your business, you may come across the option of seller financing. This means that you, the seller, offer a loan to the buyer to cover a portion of the purchase price. Instead of the buyer securing the entire amount from a third party, such as a bank, you step in to finance the transaction.

What Seller Financing Entails

Seller financing involves creating a promissory note that details the loan’s terms: interest rate, repayment schedule, and consequences of default. The buyer will make regular payments to you based on these terms. Essentially, you are taking on the role of the lender.

Pros of Offering Financing to the Buyer

• By providing financing, you widen the pool of potential buyers, as it may be more accessible for them compared to traditional funding.
• This option often enables a faster closing process since there’s no waiting period for bank loan approvals.
• You could potentially receive a higher sale price, as buyers might be willing to pay a premium for the convenience of seller financing.
• Seller financing may yield ongoing income through interest payments, potentially at a higher rate than other investment vehicles.

Cons of Offering Financing to the Buyer

• There’s an inherent risk of the buyer defaulting on the loan, which can be costly and time-consuming to resolve.
• You may not receive the full sale price immediately and will rely on the buyer’s financial stability over time.
• If reclaiming ownership due to default, the business may have lost value or suffered from poor management.
• You will bear the administrative burden of managing the loan and ensuring payments are made.

Recognize that offering seller financing could unlock opportunities that otherwise might remain out of reach. Combining your understanding of the buyer’s need with your desire for a successful sale crafts a mutually beneficial solution. Consider your financial situation, consult with financial advisors, and assess the buyer’s credibility before committing to seller financing. The sale of your business can significantly impact your financial future, so choosing the right path is paramount.