What is Seller Financing and Should Your Business Consider It?

Seller financing, also known as owner financing is a type of loan provided by the seller of a property or business to the purchaser. Seller financing is structured similar to a traditional loan and hence, it is repaid through timely principal and interest payment.  

The benefits of seller financing are mentioned below:

  • Seller financing is one of the best financing options for the borrowers who find it difficult to avail a conventional loan due to their poor credit score. Nevertheless, the seller will evaluate the borrower’s ability to repay the loan before starting the financing process. They may check the credit score, verify the business history, and consider the track record of the borrower before approving the loan.
  • Unlike a conventional loan, seller financing involves few or no closing costs or and may not require an appraisal. 
  • The down payment in case of seller financing is often more flexible than a conventional loan. 
  • Seller financing is a faster way to raise capital. With a traditional lender, you’ll have to gather your documents, apply for the loan, and wait for the approval. Even after following the process, you’ll have to wait for the loan to close. Whereas, in case of seller financing, the entire process often settles within a week.
  • In case of seller financing, different sellers have different incentives. However, if a seller is struggling to find a buyer, you may be in a good position to negotiate more favorable terms and get cheaper, quicker financing.
  • Unlike conventional loans offered by financial institutions, in case of seller financing, sellers and buyers can choose from a variety of loan repayment options, such as interest-only, fixed-rate amortization, less-than-interest, or even a combination of all of these. 
  • The Interest rates can adjust periodically or remain constant for the entire loan tenure.

However, while opting for seller financing it is prudent to understand all the terms set by the seller carefully. In most cases of seller financing, you will have to bear a higher interest rate as compared to conventional loans. While availing seller financing for your business, the seller may want you to secure the loan amount by pledging collaterals. 

It’s also important to understand that opting for seller financing would mean that you’re dealing with individual owners. Unlike traditional financial institutions, individual owners aren’t closely regulated. Therefore, make sure to evaluate the deal on a case-by-case basis to make the best decision for your business.

Since seller financing is a loan between a seller and a buyer, it is subject to limitless variations. Therefore, it is recommended to take the input of legal professionals and financial advisors before opting for seller financing. This will help you avoid any inconvenience in the later stage.

You should compare various deals offered by different sellers. This will help you avail a type of financing that best suits your needs. To sum it up, there’s no harm in considering seller financing over business loan if you find a comparatively better deal for yourself. 

 

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