How does Seller Financing work?

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In many scenarios Seller Financing is necessary for a buyer to purchase a business. For example, the business purchase price is $125,000 and the buyer only has $75,000 to put down so where can they borrow the balance? The options include a relative or friend to borrow from (not a frequent event), SBA Lenders ( that usually have a minimum loan amount of $150,000) and the buyer’s bank or credit union (if the buyer has a good relationship with them and they are able to put a lien on the assets of the company).

The bulk of sales (approximately 80%) require some sort of Seller Financing for them to go through. These are many times structured as a 3 to 5-year term loan with a Balloon Payment at the end. This is due to a 10 year (or what length of time is agreed upon) amortization period used so the payments are lower so the buyer can be making a living wage while building their business.

For the Seller one of the advantages can be that they sell their business at a Fair Market Value and act as the bank. They are able to charge a reasonable interest rate, have a lien on the business that is recorded with their County and State. There can also be some tax advantages (the seller’s accountant should be consulted). The Seller should see that the Buyer(s) have good credit and have familiarity with the type of business or is able to learn it quickly.