What Is Seller Financing

What Is Seller Financing In Business? (Explained In Simple Terms)

By Russell Bowyer

The best way to explain seller financing in business, is for you to imagine yourself wanting to buy a car from a friend, but you don’t have all the money right now to afford the purchase.

So, because your friend trusts you, and because they really want to sell their car right now, they agree to let you pay a little bit each week or each month, until you’ve paid for the car in full.

So, instead of paying for the car all at once, you pay for it over time.

The best way to explain seller financing in business, is to imagine buying a car from a friend, but you don’t have all the money to buy it. But, as your friend trusts you, and they need to sell their car now, they agree to let you pay a bit each week or month until you’ve paid for the car in full.

In this imaginary scenario, it would be important that the amount you promise to pay every week or month, is something you can afford.

Because if it’s an amount you can’t afford, the deal won’t work, as even though you’re not paying everything all at once, you still have to stick to the plan, and make the payments you’ve promised to make.

What I’ve just described, and what I’ve asked you to imagine, is just like seller financing, but instead of buying a car, you can use seller financing to buy businesses, or indeed a property too.

In this case it’s the owner of the business (or the property) who is agreeing for you pay-off the purchase price a bit at a time, which is often referred to as deferred consideration.

The seller is acting as if they are a bank and they agree to lend you the money, to buy their business or property, over an agreed period of time.

First encounter with seller financing to buy a property

Funnily enough, my first encounter with seller financing, or what is also known as vendor financing, was when I was buying a property to live in.

How this came about, is when I wasn’t able to secure the necessary mortgage to complete the house purchase, I had to pull out of the deal.

But, as the seller didn’t need all the money right away, but he was still keen to sell, he offered to lend me the money instead. Which meant, I no longer needed a bank mortgage to proceed.

This made the transaction a win-win, as it meant he still sold his house, and I could still buy it, despite not having the money to do so.

This was my first introduction to seller financing, which opened my eyes to what’s possible.

Seller financing to buy a business

When you use seller financing to buy a business, it’s not normally you that has to repay the money, it’s the business that you are buying, that repays it instead.

As with the imaginary scenario of buying the car, and paying it off over time, when you buy a business using seller financing, the business must be able to afford the repayments too, otherwise the deal is doomed to fail.

Also, and similar to the car buying scenario, the seller of the business (or property) must trust you, otherwise they’ll never agree to seller financing.

Not many people, if anyone, would lend money to someone they don’t trust, I certainly wouldn’t, and I suggest you wouldn’t either!

On top of trusting you, the seller must also want, or need, to sell their business or property, or in other words, they must be motivated to sell.

Someone who is motivated to sell, which doesn’t necessarily mean they are motivated because the business is in trouble (or that it’s a bad property for that matter), is far more open to negotiating a deal, which is similar to the house seller who offered to lend me the money to buy their house, even when I hadn’t asked them to do so.

This happened because the house-seller was motivated to sell, but he didn’t need the money. It’s also important to note that there was nothing wrong with the property either.

Offering seller financing to sell a business

The first time I encountered business seller financing, was when I sold one of my own businesses. Which in this case, I agreed to a deferred payment period of two years from the date of sale.

During the process of meeting the buyer, I built-up a great relationship with him, which meant I trusted him.

But for me, it wasn’t just the money that was important, it was that the buyer had good intentions to look after my employees and my clients too.

Many people question whether seller financing works, and many say it can’t be done, or they say you cannot buy good sound businesses (or property) using seller financing.

But this isn’t the case. However, don’t necessarily expect to go out and find a business and agree seller financing tomorrow, as that is unlikely to happen (not impossible) but unlikely.

However, with a bit of perseverance, and with the right approach, there’s no reason why you shouldn’t be able to find the right business, for the right price, and also agree to buy it using seller financing.

But remember, for seller financing to work, the person selling their business (or property) needs to trust you, and they need to be motivated to sell.

And remember, seller financing doesn’t just benefit the buyer, it benefits the seller too.

For me, when I sold my business and accepted seller financing, my win was finding a buyer I could trust to repay the money, over the agreed term, but also to sell to someone I could trust to look after my employees and my clients too.

Accepting seller financing means selling businesses quickly

But also, in accepting seller financing, it meant I sold my business very quickly, in fact I managed to sell it within 6 weeks!

And finally, borrowing money from banks to buy property is normally far easier than it is to borrow to buy businesses, which is why seller financing works so well.

The benefits of using seller financing to buy a business means:

  1. Quick to negotiate.
  2. No credit checks on the buyer.
  3. No credit checks on the business.
  4. The business is sold quickly.
  5. No lengthy bank loan forms to complete;
  6. No difficult lending conditions to meet;
  7. No minimum deposit restrictions;
  8. No “business type” lending restrictions.
  9. No risky personal guarantees for the loan, and;
  10. Very flexible.

If you have any questions on this topic about buying a business, or on any other aspect about the process involved in buying 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 buy a business.