If you're buying or selling a business, it's important to be aware of the different financing solutions on the table. Seller finance is just one of many alternatives to a traditional bank loan, but it comes with many benefits for both parties, as well as risks and considerations.
What is Seller Finance?
Seller financing is designed to bridge the gap between a business's sale price and the amount the buyer can pay upfront.
In this transaction, the owner selling the business offers the buyer a loan to cover part or all of the sale price, which the buyer repays in regular instalments. The previous owner of the business essentially provides a private mortgage to the new buyer.
Approximately 43% of small businesses in the UK utilise some form of external finance, including seller finance (also known as owner financing or a seller note). Seller finance can be a great option for both parties in a commercial sale — buyers don't have to spend months chasing a large loan from a bank, and sellers can maintain greater control over the terms of the deal.
How Does Seller Finance Work?
Seller financing works like a standard commercial mortgage, except the funding is advanced by the seller rather than a bank. Usually, the seller will ask for a down payment of at least 10%, and the remaining balance is converted into a formal promissory note.
Valuation
The process begins with a final business valuation to make sure the sale price is accurate before agreeing on terms.
Negotiation and deal structure
The buyer and seller negotiate the overall price, down payment, interest rates, and repayment period.
Due diligence
The seller will review the buyer's credit history, financial background, and references to ensure they can afford the agreed-upon repayments.
Legal documentation
The buyer's solicitor prepares a formal contract outlining the transfer of business ownership. The buyer may also need to sign a promissory note and a personal guarantee.
Finalise the sale
The buyer pays the down payment, signs the loan documents, and takes over the everyday running of the business.
Why B2B Companies Prefer Seller Financing
Many buyers choose seller financing because it offers better flexibility than standard commercial loans. Terms and interest rates are negotiable, and you can avoid the time-consuming and uncertain process of applying for a bank loan. Sellers often turn to private financing to attract a larger pool of potential buyers.
What are the Risks?
Seller finance brings many benefits for buyers and sellers, but it also comes with risks. From the seller's point of view, it can be risky to provide financing to a buyer, especially since they are an individual and not an institutional lender. As a buyer, there is the obvious risk of taking on debt, and interest rates for seller financing tend to be higher than bank loans.
| Seller finance | Buyer | Seller |
|---|---|---|
| Main benefit | Can buy a business without relying on a bank loan | Can make the business easier to sell |
| Key risk | Taking on debt and potentially struggling if cash flow falls | Buyer may default on payments |
| Flexibility | Can negotiate repayment terms and interest rates | Can negotiate terms that suit financial objectives |
| Best for | Buyers who need flexible funding | Sellers who want to widen the buyer pool |
Solving Post-Sale Cash Flow Problems
One of the biggest challenges for buyers in seller finance arrangements is managing cash flow after purchasing a new business. As well as repaying the seller, you also need to meet all your previous financial commitments: paying your staff, managing supplier costs, and affording overheads.
To solve this problem, many new business owners turn to invoice finance to unlock cash from their unpaid customer invoices in as little as 24-48 hours.
Combining Seller Finance with Invoice Finance
If you run a small business with no dedicated finance team, you may want to look into invoice factoring, where lenders advance up to 95% of your unpaid invoices while also managing your credit control and collections.
If you prefer to keep things private, invoice discounting does the same thing, except you manage the collections process yourself. Combining seller finance with an invoice discounting facility creates a stable foundation for your new business operations.