The decision has been made. You’ve decided to sell your business, and your business broker has managed to attract several potential buyers; none of whom can get the financing to close the deal.
You are not alone. Many buyers, or businesses, do not meet the criteria laid out for traditional business financing—the SBA 7A loan. To qualify for an SBA 7A loan, a buyer generally needs 25% of the sale price for a down payment. They must also have good credit and some level of business experience to prove to the lender that they have what it takes to successfully run the business. In addition, the business must generate enough cash flow to give the buyer an income and pay-back the loan.
This criteria results in frustration for business buyers when they are denied a loan from several lenders. Many buyers and sellers think that this is the end of the road, but all is not lost. Savvy buyers are not restricted to this type of financing, and many are enlisting the help of the seller to assist with financing.
What is seller financing?
Seller financing occurs when the seller of the business offers to finance a portion of the sale. The amount is usually small, about 5% or 10%, but can go up to about 50% of the sale price. Seller financing ranges anywhere from putting up a portion of the typical 25% down payment required to obtain an SBA loan, all the way to financing the majority of the sale price.
Why it may be right for you.
Seller financing is common—more so during down economies. Sellers may consider financing part of the deal because they are eager to sell and/or the market is slow. Whatever the reason, there are significant benefits to the seller that come with seller financing that should be considered:
- It increases your prospective buyer pool. Offering additional financing options deepens the prospective buyer pool. Offering some form of seller financing means that buyers who many not qualify for traditional loans may become viable candidates. Or seller financing can bridge the gap between how much the buyer has for a down payment and how much is needed.
- It may allow you to sell your business for a higher price. Businesses that are partially seller financed typically sell at a higher price. With more flexibility in terms and lending qualifications, buyers who are serious about buying a business are more amenable to a higher overall price, particularly when traditional financing is not available to them.
- It will increase the overall profit from the deal in the long run. Want to double your profit? Interest is paid to the seller on the seller-financed amount, increasing the overall revenue—by a large amount. A seller note at 8% over nine years actually almost doubles the amount received.
- Avoid the lengthy loan process and close the deal quicker. A seller can review a buyer’s credit worthiness and business experience quickly, avoiding the typical one to two months a bank would take to process the application.
- Receiving installment payments may make you eligible for significant tax breaks. Owners who finance their business can receive tax breaks for installment sales by spreading the gain out over several years. The tax implications are varied for a seller-financed sale, and sellers should contact a tax professional for specific advice on this subject.
What about the buyer?
The hallmark of any good business deal is a win-win situation for all interested parties, and seller-financing can be a win for all interested parties. Seller-financed business sales may be a lifeline to buyers who would otherwise not be able to purchase a business through conventional financing.
What type of buyer wouldn’t want to avoid the paperwork and time required by a bank loan? Qualifications are fewer, interest rates may be lower, terms more agreeable, and the process is more streamlined—and best of all, seller financing lets the buyer know that the seller has confidence in the business they are selling.
To learn more about the SBA 7A loan program, visit www.sba.gov/7a-loan-program.