Seller Financing With Business Notes

What Is Seller Financing?

Seller financing (also known as owner financing) is a method of financing a business purchase where, in addition to the cash down payment, the business buyer also creates an agreement with the business seller to owe the remainder of the business purchase price in installments over time and usually with interest.

How Seller Financing Works

When a business sale involves seller financing, a business promissory note is created where the business seller basically acts like a bank in the transaction. 

As an example, assume a business is being purchased for $200,000.

Also assume that the potential buyer is able to offer the business seller $50,000 as a cash down payment and that the business buyer is unable to obtain a traditional bank loan.

Assuming certain things about the buyer look good (good credit  score, experience running the kind of business being sold, etc.), this would be a good time for the business seller to consider offering seller financing to help the buyer finance the purchase of the business.

After the business note sale closing, a seller financed business note would have been created for the $150,000 left of the purchase after the cash down payment.

This note could be written, as an example, to be a 5-year note with a 6% interest rate secured with the remaining equipment and inventory.  The actual terms of the note would have already been agreed upon beforehand as part the business purchase agreement.

After the business note sale closing and with the seller-financed business note in place, the business buyer is able to buy the business and start earning a return on his or her investment, the business seller is able to stop having to wait for someone to purchase the business, and the business seller is able to leave the closing process with some cash ($50,000) and with a new income stream (the $150,000 to be paid over 5 years with interest).

Why Seller Financing Is Used

Seller financing is used to increase the marketability of a business for sale.

When potential buyers see that seller financing is available, more of these potential buyers might respond to an advertisement for the business for sale.

The availability of seller financing lets people know that the seller isn't necessarily looking for a transaction that is all cash or that requires a possibly difficult-to-obtain bank loan.

Seller financing also could provide some extra income to the business seller.

Not only does the seller start receiving payments soon after closing but also the seller also starts earning interest on what is basically a personal loan that the seller has let the buyer borrow as part of the business purchase transaction.

Related Articles:

Reasons to Buy and Sell

Learn the reasons people choose to buy and sell business note payments.

How to Sell Business Notes

Learn the steps involved with selling a business note.

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