Advantages and Disadvantages of Seller Financing

Advantages and Disadvantages of Seller Financing

Peak Business Valuation, business appraiser Texas, deals with seller financing almost on a daily basis. There are a number of different advantages and disadvantages to both parties when it comes to seller financing. If you are looking for more on what seller financing is, take a look at this article, What is Seller Financing? If you are looking for an example of seller financing, take a minute to read “Examples of Seller Financing.” 

Seller financing at its core is a form of lending. The seller finances a portion of or the entirety of the purchase price, and the buyer signs a promissory note with specific repayment terms and conditions. Here are some of the advantages and disadvantages of seller financing. For more information on other types of financing options read, Financing a Business.

Advantages of Seller Financing for the Seller

Monthly Cash Flow or Guaranteed Income: The buyer has a debt obligation to the seller. They must make their payments or the seller could seek legal action against them. This is a great way to receive “guaranteed income.” (assuming the buyer and the business doesn’t go bankrupt). These payments could offer the seller monthly cash flow that provides a better return than other investments.

Variety of Buyers: Seller financing is a great way to attract a buyer quickly. If a buyer knows seller financing is an option, it means they don’t need as much cash right away. This generally increases the number of possible buyers in the market.

Disadvantages of Seller Financing for the Seller

More Risk: There is an additional risk if the buyer fails to make payments or if the business closes or goes bankrupt. 

Less Return Upfront: The seller may receive less money upfront from the sale of their business because they are financing more of it on a seller note.

Added Responsibility: The seller may feel added responsibility or pressure to make sure the business succeeds so they are paid. This generally defeats the seller’s purpose of wanting to exit the business in the first place.

 Advantages of Seller Financing for the Buyer

Less Upfront Cost: You can purchase a business for very little with the help of seller financing. This is great for those who don’t have all the money upfront, or for those who can’t obtain financing elsewhere.

Lower Fees: You can avoid bank financing, fees, and other costs associated with third-party financing.

Faster: Closing the deal is generally much faster with seller financing than it is with other forms of financing.

 Disadvantages of Seller Financing for the Buyer:

Guaranteed Payments: You have a debt obligation, so you must make payments each month on the seller’s note. This can eat into the cash flow and the margins of the business.

Risk of Losing the Business: If you cannot make your payments, you may lose the business.

Higher Interest Rate: The seller will likely require a higher interest rate than most banks or institutional lenders, which means you will pay more in interest on a seller note than you would on a different form of financing.

Summary

It is important to understand what seller financing is, and how it can help take you one step closer to purchasing or selling a business. Be sure to consult with a valuation professional like Peak Business Valuation, business appraiser Texas, to understand the impact seller financing could have for you! Schedule a free consultation call with us today!

 

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