An owner financing a business for sale means the original owner will personally finance all or a portion of the purchase price. Rather than having to come up with the full amount, the buyer typically makes a down payment then pays the balance in monthly installments. The seller acts as a lender, even though they don’t actually deposit any funds into the buyer’s bank account.
Technically, the business hasn’t been 100% paid for, but the buyer is still able to immediately start running and managing it after the sale.
Read on for a closer look at how owner financing works, the pros and cons of this type of financing, as well as other loan options buyers may want to consider when purchasing a business.
What Is Owner Financing When Buying a Business?
Business owner financing (also referred to as seller financing) is when the original business owner offers the buyer a loan to cover all or some of the price of the business.
Generally, the buyer makes a down payment in cash as soon as the deal closes. The seller’s loan may cover the remaining amount of the sale price, plus interest, according to the terms set by the seller and agreed to by the buyer. If the seller’s loan doesn’t cover the entire cost of a business, buyers will often use another form of financing in combination with their seller’s loan.
If properly structured, seller financing can be a good fit for both parties. A buyer who may struggle with finding other financing sources can still become a business owner. For the seller, offering owner financing can make it easier to sell a business by expanding the pool of potential buyers.
How Does Owner Financing Work?
Business owner financing deals vary, but often they are structured in such a way that only a portion of the purchase is owner financed — meaning the buyer still needs to come up with a majority of the purchase price on their own. In some cases, however, the buyer will make a downpayment and the seller serves as the only lender for the remainder of the purchase price. Either way, a lawyer will typically draw up and file the terms of the loan in a promissory note, which is essentially a legally binding IOU.
Repayment terms for a seller financing loan tend to be similar to those of a business bank loan, with repayment lengths of five to and seven years, monthly payments, and interest (which may be the same or lower than bank prime rates).
The business itself may act as the only collateral, meaning that if the borrower defaults, the seller can reclaim the business and its assets, as well as control over its operations. Often, though, sellers will require additional collateral, usually in the form of a personal guarantee. That personal guarantee allows the seller/lender to seize and liquidate the borrower’s personal assets in case they fail to repay their debt.
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Pros and Cons of Owner Financing a Business Sale
There are advantages and disadvantages to owner financing for both owners and buyers. Here’s a closer look.
For Buyers
Pros
From the buyer’s perspective, an owner financing business for sale can make a lot of sense. For starters, it can be easier to qualify for since the seller may have more flexible eligibility requirements than a traditional lender.
Another benefit is that the buyer doesn’t need to come up with the full asking price right off the bat. Even if the buyer does need an additional small business loan, it won’t have to be as large as it would be without owner financing.
In addition, the buyer can feel secure in knowing that a seller offering seller financing is confident that the business will generate sufficient cash flow to help the buyer repay the loan. What’s more, banks view seller financing as buyer equity, and may be willing to lend more money in a seller-financed business for sale transaction.
Also, the purchase agreement is typically negotiable. Sellers offering owner financing know that both parties must agree to every aspect of the purchase deal for the sale to go through.
Cons
On the downside, a large portion of the purchase price may still need to come from either cash or by getting a small business loan. Very few sellers are willing to do 100% owner financing because of the amount of risk associated with this type of purchase.
In some cases, the seller may raise the purchase price when they are offering seller financing because they are likely to have more than one interested buyer. In addition, they may request collateral (in addition to the business itself) or a personal guarantee. That means that, should you fail to repay the loan, you could lose valuable business or personal assets.
Finally, there may be some transition challenges. The seller may provide training to put the buyer in a position to succeed at running the business. This training could potentially be insufficient, or the buyer might be overly involved or interfere with operations, which can be frustrating for the buyer.
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For Sellers
Pros
A major advantage for sellers is that they can often make more money on the sale of their business with owner financing. One reason is that they can often increase their asking price due to an expanded buyer pool. Any seller willing to advertise “Owner Financing Business For Sale” is likely to get more offers than they would without it. On top of that, they can charge interest on the financing.
If an owner is retiring, seller financing may be appealing because it offers a form of regular passive income.
Cons
On the downside, not getting all the cash for the sale up front means the seller doesn’t have that money to invest elsewhere, which could cause them to lose out on investment and other financial opportunities that could pay off down the line.
Also, there is risk involved in seller financing. If a buyer defaults on the loan and the seller doesn’t have the proper protections in place, the seller could lose that money with no ability to recoup the loss. Even with protections in the palace, legal intervention can be costly.
| Pros | Cons | |
|---|---|---|
| Buyer | Can be easier to qualify for than a traditional loan | Will likely need to make a large down payment |
| Full asking price doesn’t have to be made with cash or a business loan | May still need to take out a business loan | |
| Seller has a vested interest in the business’s success | May require collateral or a personal guarantee | |
| Structure of the purchase agreement is negotiable | Asking price may be higher | |
| Seller | May be able to sell at higher price | Risks involved |
| Earn interest | Legal intervention in the event of buyer default can be costly | |
| Typically required | Sometimes required | |
| Monthly payments can be viewed as income | Ties up capital that could be used for other business opportunities | |
| Expands buyer pool | Still tied to the business |
Other Ways to Buy a Business
Seller financing isn’t the only way to purchase a business. And, even if you do use seller financing, you may still need to find another source of financing to complete the deal. Fortunately, there are various kinds of business loans that can be used to buy a business or franchise. Here are some options to consider.
Business Acquisition Loans
A business acquisition loan is designed to help you purchase an existing business. These bank loans can also be used to buy assets from a business or buy out a business partner. They are typically structured as term loans, in which you repay the borrowed funds, with interest, over a set period of time. Loan amounts, interest rates and repayment terms vary by lender.
Although you may ask for a specific loan amount, some lenders will only offer you a percentage of purchase price and require that you supply the remaining percentage as a down payment. In addition, the lender may use a business valuation, along with other factors, when determining the loan amount to offer.
Business acquisition loans can be difficult to qualify for, and collateral may be required to secure your financing. In some cases, tangible assets from the company you’re looking to purchase can serve as collateral for the loan.
SBA Loans
U.S. Small Business Administration (SBA) loans are offered by a variety of SBA-approved lenders. The SBA guarantees these loans in case a borrower defaults, which lowers risk for the lender. As a result, these loans typically come with attractive rates and terms. The SBA 7(a) loan is one of the most common SBA loans and can help cover the costs that come with purchasing an existing business.
While qualification requirements for SBA loans tend to be strict, it is often easier to get an SBA loan to buy a business than to start one because lenders can evaluate the financials of the business you’re buying.
Private Small Business Loans
Getting a small business loan through a private lender can be easier than an SBA loan. Plus, borrowers often receive their money faster with a private small business loan than they would with an SBA loan. Interest rates may be a little higher, but the overall process is usually much smoother.
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Online Business Term Loan
Alternative online lenders offer a variety of loan products to small business owners, including term loans, which you can use to buy a business.
These private lenders generally have less stringent qualification requirements than traditional banks. As a result, you may find it easier to get approved for a business loan with an online lender than with a bank or credit union if you’ve never owned a business before or have less-than-stellar credit.
Online lenders also typically have a much faster underwriting process. Some will vet your application and, if you’re approved, issue funds as soon as the same business day. However, these loans tend to come with higher interest rates and shorter terms than term loans through a traditional bank, credit union, or SBA lender.
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The Takeaway
Owner financing is a financing method that allows a buyer to purchase an existing business without having to pay the full asking price up front. Owner financing sales often still require the buyer to come up with a large portion of the sale price, meaning you may still need to find a small business loan.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Is owner financing a business a risky idea?
Not necessarily. As with any financing deal, there are some risks involved on both sides of the deal. For the seller, there’s always a chance the buyer will default on the loan. For the buyer, owner financing carries the same risks as any small business loan. Should you run into trouble making your payments, you could lose any assets you put up as collateral. If you sign a personal guarantee, your personal savings or home could be at risk.
How does selling a business with owner financing work?
Business owner financing can be structured in a variety of ways depending on the needs of the seller and buyer. Typically, the buyer will need to come with a significant portion of the purchase price (via cash and/or an outside loan). The seller will then finance the rest of the cost. There is usually a set loan term, interest rate, and monthly payment amount. For the most part, owner financing works in a similar way to standard business loan.
What are the disadvantages of owner financing a business?
For the owner, financing the sale of their business carries risks. If the buyer defaults on payments, there could be a lengthy legal proceeding, which generally comes with costs. In addition, seller financing ties up capital that they could use for other investments.
For the buyer, seller financing often comes with a higher purchase price, since many buyers may be interested. In addition, buyers often need to pay a large portion of the asking price up front. As a result, they may still have to take out a business loan. Sellers may also require collateral or a personal guarantee.
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