"Financing. Where do I get it?" It's one of the most frequently asked questions we encounter with potential business buyers and, perhaps, the one with the biggest number of answers! At Transworld, we specialize in walking buyers through different financing options. Some options are well-known, like SBA Loans, Conventional Loans, and the use of private investors. Other financing options may not be as well-known but are often the perfect solution for both sellers and buyers.
One such solution is Seller Financing, which involves short-term promissory notes between buyers and sellers. When using this option, a down payment is predetermined and agreed upon between the buyer and seller. The notes can be as creative and detailed as the two parties agree to. Typical terms include a 50% down payment - note that the industry standard is 40-50% down - with the remaining 50% balance due over a certain duration - typically 3, 5, or 7 years. Interest rates can vary but tend to range between 4-7%.
The pros and cons of seller financing are different for both buyers and sellers. One overall benefit includes a more streamlined transactional process for less cost. For buyers particularly, seller financing allows for some residual "skin in the game" from the seller - meaning that the seller still has a vested interest, concern, and confidence in the future growth of the business. The note, therefore, is a bond for performance. The benefits for the seller include maintaining a stronger position when asking for a better sale price, along with an overall faster sale.
On the flip-side, buyers are aware that they are required to sign personal guarantees for the loan, as the sellers are acting as the bank. The risk of default increases for sellers when unqualified buyers are involved.
At Transworld, we take precautionary measures to ensure that our buyers are highly qualified to participate in Seller Financing and clearly communicate the costs and benefits of this type of financing to our sellers.
To learn more about Seller Financing and other funding options available to our buyers schedule a consultation today!