Can a Seller Lend a Buyer Money?
The seller of a business can lend a buyer the money to buy their own business, and this type of lending is called seller financing.
The seller of a business can lend a buyer the money to buy their own business, and this type of lending is called seller financing. Business buyers prefer seller financing because it’s quicker and easier to arrange than bank financing, which means it will be quicker for the business to be sold.
Lending money to would-be buyers is a great way to attract more buyers for your business.
Seller financing works well for those buyers who either don’t have the necessary cash to buy a business, or for those buyers who may not qualify for a bank loan.
And always remember, that just because someone doesn’t have the necessary funds to buy a business, and/or if they don’t qualify for a bank loan, doesn’t mean you shouldn’t lend them the money to buy your business.
Lending the buyer the money will also help speed up the process, as there is no need to deal with a third-party lender.
Banks tend to complicate the business buying and selling process, as they often make it into a long and drawn out process.
Banks have very rigid lending criteria, and strict lending guidelines, which means if either the buyer and/or the business they are buying doesn’t meet their strict lending criteria, they may refuse to lend in the first place. Which would mean the sale of your business would fall through.
So, if you’re after certainty and a quick sale, offering seller financing is a great way to sell your business.
Seller finance only works if you don’t need the money upfront
Lending the buyer the money only works for you, as the seller, if you don’t require all of the money right now.
But you need to be willing to trust the person who is buying your business, before you lend them the money to buy it.
So, you need to spend time getting to know your buyer.
A few years back I sold one of my businesses with seller financing, as I didn’t need the funds upfront.
But for me it wasn’t just about the money, it was also to find a buyer who I could trust to look after my employees and clients too, after the sale completed.
It was for these reasons I looked for a buyer who I could trust, so if I could trust them to take care of my employees and my clients, I saw no reason not to trust them to repay the loan as well, which they did.
Also, to highlight how quickly you can sell a business using seller financing, my business took just 6 six weeks to complete. That would probably never happen when bank lending is involved.
The speed of the sale process was helped by the fact that I had everything ready for the buyer for the due diligence process, which meant that anything the buyer asked for, I already had, on hand to give to them.
As an aside, having things ready for due diligence, gives a buyer confidence in your business, as they go through the due diligence process. So, I always recommend you prepare your business for sale, and get everything in place a buyer is likely to ask for, so you don’t waste time at this stage of the selling process.
As I’ve gone through the process of both selling, and buying businesses, I understand both sides of the story. If you would like some help from me, please drop a comment below.
Benefits of seller finance for sellers
Another benefit to you as a seller, and by you standing in as the lender to the buyer, is the ability to charge interest on the loan.
As the seller, it’s possible to charge a higher rate of interest on the money lent to the buyer, than it would be if you were to receive all the funds upfront and put the funds on deposit.
On top of that, if your business has excess cash in the bank, which is the cash over and above the working capital requirement of the business, if this excess cash is paid as part of the sales proceeds, you may also save tax in the process too.
This is because you receive better tax breaks on the proceeds from the sale of a business, than you do if you receive these funds as a pre-sale dividend instead.
Another tip to help the buyer buy your business, and for you to receive a bigger lump of cash upfront, is to arrange asset finance on the assets of the business. This could be to arrange asset financing on equipment or vehicles the business has, or even to arrange invoice financing (or factoring) on the amounts owed from business customers.
Or indeed, you could negotiate with the buyer that they retain any existing loans the business has, as this may make the purchase work better for the both of you. But only do this on loans the business has that don’t carry personal guarantees from you.
The business must be able to afford the repayments of seller financing
It’s important to be aware that when you’re negotiating the seller financing payment terms, it will be the business that will be repaying the loan.
Which means the repayment-term of your loan to the buyer must be such that the business’s cash flow will be sufficient to cover your loan repayments, alongside any other lending commitments the business has, or will have as a result of structuring the deal.
There would be no point in you pushing the buyer for payment terms that the business simply can’t afford, otherwise the buyer will end up defaulting on the loan, which would be in no one’s interest to happen.
Also, be aware that your solicitor may attempt to put road blocks in the way of the sale when seller financing is involved, especially if they’ve never dealt with seller financing before.
They may suggest you ask for a personal guarantee from the buyer, or to get security for the loan. But I suggest you don’t insist on a personal guarantee, otherwise this will become a road-block for your business sale, but there’s nothing wrong in insisting that your loan is secured on the assets of the business, in case the buyer defaults.
Seller financing means you are in control of the lending terms
The beauty of you becoming the lender to the buyer of your business, is that it’s you and the buyer who create the terms for the loan.
Which means that you are in control of the process, rather than being at the mercy of a bank, who may end up wasting everybody’s time, if at the end of the form-filling process, they refuse to lend the buyer the money.
Whereas if you lend to the buyer the money to buy your business, you create more certainty with the sale of your business, and you speed up the process too.
If you have any questions on this topic, or on any other aspect about the process involved in buying or selling a business, please drop a comment below.
And always remember that no question is a stupid question, if you don’t know it, you don’t know it, and by having the answer to a question you have, might be all it takes to move to the very next step in your journey to sell your business.