What is Seller Financing?

Seller financing is a loan provided by the seller of a property or business to the buyer, in other words, the seller is helping finance the transaction.  There are certain scenarios where seller financing may be the best and/or only option, such as when a buyer may not be able to secure the financing due to unfavorable credit markets or if the buyer has limited capital at that specific point in time.  Needing commitments from both side of the transaction, sellers may agree to finance a portion of the deal over a specified term (usually ranging 3-7 years) concluding with a balloon payment (one-time lump sum due at the end of the loan) with the buyer acting as the debtor. 

Seller financing should be facilitated through a promissory note.  The promissory note is essentially a legally binding IOU and will outline the terms of the arrangement including items such as interest rate, repayment schedule, and consequences of default.  Some transactions can be managed by the owner but assistance from an attorney is highly advisable to ensure all bases are covered.

Typical Seller Financing Terms

Loan Amount: 30% - 60% of the purchase price
Term Length: 3 – 7 Years
Interest Rates: 6% - 10%
Repayment Schedule: Monthly

Advantages of Seller Financing

• Ability to negotiate interest rate, down payment, repayment schedule, and other loan conditions

  • Seller often benefits from more attractive interest rates and a higher selling price to offset the delayed payment and vulnerability to limited contractual protections.

  • Buyers may offer an equity position to remain with the seller for the owners who want to remain involved in the business.  This could provide a future revenue stream for the seller as well as the ability to retain health care benefits.

• If the property sells for a substantial profit, the seller can spread the resulting capital gains over multiple years, reducing the overall tax burden by turning the transaction into installment payments.

• The transaction process usually results in a faster closing as there will be no delays for the buyer to secure financing nor a lengthy bank loan process.

• If the buyer ever defaults, you may be entitled to keep the business and/or property along with all payments already received (default consequences should be determined prior to sale).  The owner will typically keep the property title until all the payments have been made to protect against default.

Disadvantages Seller Financing

• Sellers won’t receive the full sale price at closing, but rather accumulate the total over several years.

• Buyers will generally have to accept higher interest payments which in turn could offset the benefit of leverage and reduce IRR (internal rate of return).

• Due-on-sale-clause: if the seller has a mortgage on the property, their bank or lender can demand immediate payment of the debt in full when the property is sold.

• Many seller financing arrangements conclude with a large balloon payment which can be worrisome for the seller if they have doubts in the buyer’s ability to make the payment.