Navigating Seller Financing: What You Need to Know

Entrepreneur Janelle Regotti was faced with a dilemma in 2014 when she found the perfect business to buy, but didn’t have the $500,000 asking price. With the help of her business broker, she negotiated a seller-financing deal and bought the business with just 10 percent down and quarterly payments due over 10 years at about 6 percent interest.

Seller financing can be a great option for buyers who may not have the full asking price upfront. Renzo Aida, who bought a dance studio near Boston, was able to negotiate a deal with the seller when they couldn’t agree on the price. Aida has since increased revenue by 28 percent.

Sellers expect buyers to have experience in the industry, a solid business plan, working capital, and roots in the community. They treat these loans seriously, requiring a credit check, collateral, and life insurance. Loan terms often extend up to 10 years, with interest rates comparable to those offered by banks.

Buyers should thoroughly vet the deal by inspecting financials, physical property, and ensuring they trust the seller. Negotiating terms can be creative, with options like applying for an SBA loan down the line or including an earn-out clause based on profits meeting expectations.

Seller financing can be advantageous for startups, as it helps get the deal done with less out-of-pocket expenses for the buyer. Bill Short, who purchased a fiber optics company, was able to make a 40 percent down payment, borrow 50 percent through an SBA loan, and borrow the remaining 10 percent from the seller. Since purchasing the company, Short has seen revenue increase by about 20 percent.