Seller financing is playing an increased role in the sale of small businesses
" 'Banks have been exiting the small business loan market for over a decade,’ the authors write. Bank consolidation has left fewer local banks to lend to small firms. And small-business loans are less profitable because they are more difficult to automate and more expensive to underwrite and service...” - Wall Street Journal, August 14, 2013
Since the Recession of 2008, Banks have continued to retreat from small business purchase financing:
“Seller financing is an integral part of today's business-for-sale marketplace... roughly 90 percent of successful small business sales involve the owner financing a portion of the purchase price." - Inc Magazine, January 30, 2013
As a result, Sellers of small businesses are more willing than ever to consider seller-financing:
An example of a Seller-Financed Business Note
Business notes are created when a business seller decides to help finance the sale of their business. The note usually equals the difference between the sale price of the business and the buyer’s down payment. For example, a business owner decides to sell a laundromat for $300,000. He or she finds a buyer, who doesn’t want to deal with the hassles, high rejection rates, or painfully long underwriting process of a conventional bank/SBA loan, so the buyer asks the seller to finance the sale. The buyer makes a down payment of $60,000 and the buyer signs a Promissory Note (or Business Note) with an original balance of $240,000, payable to the seller in monthly installments.
Once the seller and buyer have agreed to the terms of the financing (the interest rate, the monthly payment, the number of payments, etc.), the buyer signs the Promissory Note, which is a binding contract between both parties. Once the Note is signed, the seller becomes the "Noteholder". The buyer then sends payments to the seller every month until the $240,000 balance is paid in full.
Did you know that Business Notes can be sold?
Security Financial Services buys Business Notes. SFS will offer the seller a lump sum today in exchange for the Note’s future monthly payments, assuming the Note meets our purchasing criteria. Generally, we need to see that the buyer has made at least the first monthly payments before we can bid.
Benefits of Seller Financing
Below is an excerpt from fitsmallbusiness.com:
Some sellers are initially reluctant to provide seller financing because of the risk that the buyer won’t pay back the loan, but it can benefit both the buyer and the seller. Seller financing helps the seller attract buyers and get a higher price for the business, and it helps buyers who may not have access to the full purchase price through other means.
Here’s the specific benefits of seller financing for both buyers and sellers:
Owner Financing Benefits for Buyers
Get Cheaper Financing
Access to Financing
As a buyer, seller financing can get you access to a large amount of capital that you may not qualify for otherwise, and it is typically cheaper than getting a loan from a lender. [SFS comment: it's also much less time consuming and simpler (no need to submit reams of paperwork to a bank/lender).]
Owner Financing Benefits for Sellers
Attract More Buyers
Make More Money
Increased Sales Price
With seller financing, you can attract more buyers and price the business higher because you’re providing financing, which allows the buyer to pay for the business over a period of months or years. Many serious buyers will not even commit to buying a business that doesn’t offer seller financing because if the seller has no skin in the game, the business opportunity doesn’t look as attractive. [SFS Comment: Additionally, as a seller you can dictate the timing of the closing and approve the Note terms (rate, monthly payment, maturity date, etc.) yourself.]