There are many ways to finance a business acquisition if you can’t afford the full purchase price. A popular option is seller financing, meaning that you pay the seller slowly over time.
Seller financing can be a great option for buyers who may not qualify for a bank loan. It can also help to speed up the process, as there is no need to deal with a third-party lender.
In this guide, we’ll explain what seller financing is and how it works. We’ll also discuss the benefits and drawbacks of using seller financing to buy a business.
What Is Seller Financing?
Seller financing, also called owner financing, is a financial agreement in which the seller of a business covers a certain percentage of the purchase price. The buyer then pays this back over time, much like a traditional acquisition loan.
It’s estimated that 60-90% of business acquisitions in the UK involve some form of seller financing. When buying a business, seller financing may be a good option if:
- You can make a down payment but lack sufficient funds to cover the asking price
- You don’t qualify for a bank loan, or want to avoid the hassle of the application process
- You are prepared to make regular repayments with interest over time
As with any type of loan, you’ll have to sign a legally binding contract outlining the terms and conditions. It’s important to read this carefully and establish whether the repayment plan is sustainable for you.
How Does Seller Financing Work When Buying a Business?
Buying a business with seller financing can be tricky, as not all business owners are amenable to it. Handing over their business without full payment is a big risk for the seller. They’ll need to establish that you’re trustworthy and have the necessary skills to run the business successfully.
The seller has the right to check your credit history to decide whether to offer you financing. If you have a lower credit score, you may have to make a larger down payment, pay a higher interest rate or secure the loan with collateral.
Once you’ve agreed on the terms of the loan, you’ll put together a seller financing contract. This can be done with the help of a professional business broker such as Chelsea Corporate.
What Does a Typical Seller Financing Contract Look Like?
Every seller financing contract looks different. The terms may depend upon factors such as your credit history and how much the seller is willing to lend. A typical seller financing agreement will contain details of:
- The deposit: this is the amount that you must pay before the sale is finalised
- The total loan amount: typically between 5% and 50% of the business’s total selling price
- The interest rate: this is usually around 6-10%
- The term length (how long it will take you to repay the loan in full): normally 3-7 years
- The repayment schedule: you’ll usually make a payment each month, though the amount may vary if business is seasonal
- Non-payment conditions and collateral used to secure the loan
As the buyer, you have the right to negotiate the terms and conditions with the seller. If there’s anything you don’t understand, speak to your business broker or solicitor.
What Are the Benefits and Drawbacks of Seller Financing?
The obvious downside of owner financing is that you risk losing the business if you default on repayments. It can also be harder to find an owner-financed business for sale, as some sellers insist on payment in full.
However, seller financing boasts many benefits over traditional bank loans. For example:
- The lending criteria aren’t as strict, so you’re more likely to be approved
- Avoid a lengthy, cumbersome applications process
- No third-party involvement means the acquisition takes less time to finalise
- Interest rates are usually lower
- You have more freedom to negotiate the terms and conditions
Not to mention, because you’re paying the seller slowly over time, they have a vested interest in your success. This means they will usually be happy to offer free advice and guidance on running the business.
How to Find a Business for Sale with Seller Financing
If you’re looking to buy a business with seller financing, Chelsea Corporate can help. We are UK-based business brokers specialising in on off-market mergers and acquisitions. Through us, you’ll have access to an exclusive database of off-market businesses that you won’t find anywhere else.
Get in touch today and we’ll match you with a profitable, successful company that meets your budget and requirements. If seller financing is a priority, we’ll help facilitate an agreement that works for both parties. It’s our mission to make buying a business as smooth and stress-free as possible.