Introduction to Business Financing
Many buyers of businesses are looking to invest in businesses which they can afford to purchase outright, even if this involves short-term Earn-out agreements, which typically are not arranged primarily for finance shortfall reasons. However, many of those looking to build a portfolio of businesses or looking to acquire a seriously high-value business may need to source finance.
Challenges in Securing Traditional Business Loans
Traditional business loans from banks and other major lenders are difficult to obtain for business investment. Currently, banks are highly risk-averse and even when lending for more conventional business purchases they will be restricting lending to home equity based loans. Amazingly, after all these years of online business progress, the major banks still tend to be out of their lending comfort zones in the business website world, not really understanding or being confident about the way it operates.
Alternative Financing Options
Unsecured loans from small business loan specialists, including online lenders, are more readily available but generally come with unattractively high interest rates and often burdening fee structures. Private equity firms which finance online business acquisitions tend to be interested only at high-value levels, and with lots of strings attached including an intrusive degree of business control or oversight.
How to Calculate the Amount Financed
Seller Financing generally relates to a proportion of the agreed sale price. It is an agreement to pay / fund an amount over time where this principal balance bears interest at an annual rate, i.e. 6% per annum, with the principal and interest paid in monthly instalments based on an agreed period, typically between 1-5 years. You can calculate the amount financed right now with Flippa’s Seller Financing Calculator.
Benefits of Seller’s Financing
Whether you are a buyer or a seller, give serious thought to the mutual benefits of vendor financing. As a seller, if you are in need of the full purchase amount immediately, then of course this arrangement is out of the question. However, you will greatly increase the pool of potential buyers and the purchase price achieved if you are able to offer vendor finance for an agreed proportion of the purchase price.
Example of Seller’s Financing
To illustrate, the owner of the business (owned outright and with no existing mortgages or liens attaching to the business) agrees to a sale price of $100,000. The buyer who has only $40,000 available as deposit, after judiciously retaining sufficient funds for immediate operating expenses and contingencies, has been enticed to pay a premium price because of the availability of seller finance. Ideally, the upfront payment is better to be between 60% and 80% of the total sale value.
Disadvantages of Seller’s Financing
For the Buyer
- Possibility of high interest rates
- Sellers can run a credit check and refuse financing
For the Seller
- There’s more risk involved
- The buyer could stop making payments at any time
- Taxes could complicate things
Mutual Advantages of Seller’s Financing
While for the buyer the obvious advantage is the capacity to access a business purchase which could not be afforded if the entire amount was required up-front, there is an additional benefit in the continued interest of the seller in the success of the business. For the seller, provided access to 100% of the funds from the sale is not required immediately for other purposes, then the regular income stream with an interest rate which is fair and reasonable but actually quite favorable to the seller is a great advantage and effectively raises the actual sale price achieved.
Conclusion
Seller finance is certainly an option which should be considered. In fact, it’s such a mutually beneficial situation that a rapidly increasing proportion of online business acquisitions are now financed on this way. For most vendors, offering seller finance is a sure-fire way to seal a deal. Overall, seller financing is a win-win solution to a business purchase arrangement, and we can expect to see exponential growth in seller financing arrangements. Whether you’re an aspiring entrepreneur or a seasoned investor, Flippa offers a world class technology platform and advisory team tailored to your business acquisition needs.