What if your best business financing option was right in front of you all along?
For many businesses, seller financing provides a great way to make their startup dreams come true. However, some owners are on the fence because they don’t know how the process is supposed to work.
Wondering if seller credit is a good option for your business? Keep reading to discover our definitive guide!
What Is Seller Financing?
We’ve prepared a comprehensive guide to seller financing (also known as seller credit). Before we can go any further, though, it’s important to establish what this financing is all about.
This is a form of financing in which the existing owner of a business is willing to help finance the sale of the business. This means that you as the buyer will either deal solely with the seller or with a combination of the seller and other agencies.
Seller financing can present options you never had before as a buyer. However, there are also some cons to this arrangement that you should know all about.
Keep reading to get into our list of benefits and drawbacks of seller financing.
Arguably, the biggest benefit of seller financing is that you might get approval through a seller whereas you could not get approval through a bank.
Letting the owner finance your purchase is a great way to work outside of the often annoying confines of the lending world. However, it will kick off a long relationship between buyer and seller, with no one to really act as a middle man.
If you cannot secure business funding through a traditional lender, then owner financing may be a great option to explore.
If you’re evaluating whether seller financing is the right path for you, then we have a simple question: do you know what your alternatives are?
Many business startups are funded by a combination of sources. However, if you try to fund a shortfall using credit cards, it can quickly spell disaster for your business.
As you well know, credit cards often have high interest rates. And at the amounts you will be borrowing, the interest will add up very quickly!
With seller financing, you can get the money you need at a competitive rate. This allows you to keep the credit cards (and all the debt that comes with them) at bay.
Flexible Down Payment
With traditional lenders, the down payment you make on a business is usually fixed. That leaves very little room for any kind of negotiation.
However, with seller financing, you and the seller are in an open dialogue with one another. This leaves room for you to negotiate a more competitive down payment than you would otherwise have.
Obviously, the exact amount of the downpayment will vary from purchase to purchase. But simply having the option for negotiating a better price is music to some buyers’ ears!
Of course, the down payment isn’t the only area where there is room for negotiation. And the ability for enhanced negotiations may be one of the best ways you can secure seller financing.
Most business owners don’t want to sell their business to just anybody. If possible, they would like some kind of assurances that the business they put their heart and soul into will end up in the right hands.
During the discussion and negotiation phases with the seller, you’ll have an opportunity to demonstrate your knowledge of their business and your vision for the future. This can help to persuade a seller in a way that it would never convince a traditional lender.
The Interest Gamble
Not every aspect of seller financing is beneficial. There are a few potential drawbacks, including the gamble that you are taking on interest rates.
Earlier, we mentioned how seller financing allows you to get a better interest rate than you would get on a credit card. However, the interest may still be higher than you would get on most business loans from a traditional lender.
The business owner may want to charge a higher amount of interest because it will take them a longer time to profit from this sale. This means you must determine whether it is worth such an interest rate to go ahead and start your business.
The Qualification Conundrum
Like we said before, many people flock to seller financing because they are having trouble obtaining traditional financing. However, the seller is still able to determine if you are qualified for a loan.
As an example, you may be pursuing seller financing because you have credit that is poor or simply fair. However, the seller can still run a credit check on you and potentially deny the sale based on that credit report.
The ultimate downside to seller financing is that they are the only ones who determine loan qualifications. You must be able to meet these qualifications or find another lender.
Balloon or Bust
A final potential drawback of seller financing is the so-called “balloon payment.” This refers to a larger payment that takes care of any outstanding principal sum on the loan amount.
It’s not uncommon for these balloon payments to be required after five years, even if the lifetime of the loan is twenty or thirty years. This means that you need to make sure that you are able to pay this balloon payment when the time comes.
For many startups, that means you are making a kind of gamble. If your business is unsuccessful or simply slow to success, it may make it difficult for you to pay the balloon when the time comes.
Seller Credit: The Bottom Line
Now you know the full story behind seller credit, including the pros and the cons. But do you know the other tips it will take to make your business as successful as possible?
Here at Dealstruck, we are devoted to helping your business thrive and grow. To see what we can do for your new business, come check out our startup resources today!