Business Valuations and Financing
Pros and Cons of Seller Financing for the Buyer
When buying a business, deciding how to finance your purchase isn’t a decision to take lightly. Your seller may offer seller financing, but is it right for you? Keep reading to review the pros and cons of seller financing for the buyer.
What is Seller Financing?
Seller financing, also known as owner financing, is a type of business financing where the seller serves as a lender and offers the buyer a loan to finance the purchase of their property. In a seller-financed sale, the buyer and seller make financing agreements themselves without the involvement of a bank. It can be a great option for both parties, but like any financing, it has risks along with its benefits.
Pros of Seller Financing for Buyers
Here are some advantages of seller financing:
1. Faster Closing
With seller financing, you won’t have to wait for a bank loan officer, underwriter, or legal department to process and approve the application. This ensures a quicker closing process compared to traditional loans.
2. Cheaper Closing Costs
Since a bank isn’t involved in a seller-financed sale, there are fewer fees and no appraisal costs. In fact, you can avoid a whole scope of other costs that traditional lenders typically charge.
3. Flexible Down Payment
While you’ll still have to make one, it’ll be more flexible because you can negotiate with the seller without worrying about bank or government-required minimums.
4. Easier Financing
Can’t get approved for a loan? Owner financing deals are a good option if you’re having a hard time qualifying for traditional financing. Sellers aren’t likely to subject you to the strict loan approval procedures that traditional lenders use. However, it’s still important to remember that they’ll likely at least run a credit check before agreeing to finance you.
Cons of Seller Financing for Buyers
Here are a few disadvantages of seller financing:
1. Higher Interest Rates
The interest you pay with owner financing will likely be higher than you would pay to a bank. The seller may also list a higher purchase price with seller financing.
2. Shorter Loan Periods
While loan periods are determined on a case-by-case basis, loan repayment terms are typically fairly short. Sellers often offer shorter loan periods than banks. If you need a longer period to repay your loan, you may want to consider a different type of financing unless you can negotiate with the seller.
3. Balloon Payments
While you’ll have to make regular monthly payments, sellers may ask you to make one large lump sum payment to cover the remaining loan balance at the end of the loan term. This is known as a balloon payment. If your seller requires a balloon payment, you’ll need to ensure that you can pay it when the time comes.
4. Additional Closing Documents
While it’s not a big undertaking, seller financing will likely require you to obtain more documents like a promissory note, personal guaranty, security and subordination agreements, and UCC-1 filing. You may also need other security documents like a deed of trust if real estate is secured.
Are you venturing into a new business opportunity? Our brokers have the industry knowledge and expertise to help buy a business using the financing option that best suits you. Find a Sunbelt location near you today to get in touch with one of our experts.