Setting up a business and keeping it running can be a very stressful task to do especially when the business is small, most people just don’t see any reasonable future in their idea and they eventually give up on it.
There are some other sets of entrepreneurs that don’t want to start a business from the scratch instead they are willing to buy off any small business that wants to be bought.
To be able to buy off an ongoing business, you will need a very large capital and since banks may not grant you the loan, it is more reasonable to find another way to get it.
This brings this article to bear.
Hi everyone my name is Timileyin and in this article i will be discussing about how seller financing can be used in a small business.
Let’s understand what seller financing it first.
This works pretty much like the term in real estate business known as owner financing.
Due to the fact that most buyers don’t have financial wherewithal to purchase a small company on their own and banks may not be willing to lend them money, they result to another approach and that’s where seller financing comes in.
This approach is such that both the buyer and seller come to an agreement in which the buyer will make periodic deposits mostly on a monthly basis so as to gain ownership of the business afterwards.
Before this deal gets started, the deal has to be written in a document and such document will state how things will play out if the buyer stays faithful to his end of the bargain and what will happen if the buyer doesn’t stick to his deal.
Advantages of seller financing in a small business.
- From the definition given above, i’m sure you can easily deduce that one of the main advantages of seller financing is the fact that it’s friendly to potential buyers which means buyers can pay bit by bit over a period of time.
- Seller financing is profitable for businesses that the owner wants to quickly sell it off and also for buyers that don’t want to go through the rigorous startup phase.
- This business sense is also profitable in a way because it helps the sellers generate a higher purchase price and also get a stable cash flow for that period of payment.
Disadvantages of seller financing in a small business
The primary risk involved here is the risk associated with it.
This risk is typical to the fact that some sellers don’t know the worth of their businesses and they stand the chance of pricing their businesses below the appropriate value.
Another risk that could be involved is the legal standing of the whole process that’s why it is important to hire an attorney if possible to ensure the process is handled well and actions will be taken if the buyers faults from the agreement.
Another issue about this approach is that the seller still has some level of authority in the business until the full payment has been done and in the event that such payment doesn’t get completed by the time it’s meant to be, the seller gains full control of the business.
Who is eligible to go into seller’s financing
It is important to establish the fact that this business strategy works for a couple of buyers and sellers that have the right attitude and attributes to it.
Every successful seller tries to avoid buyers that try to beat down the price tag placed on the business.
Also, buyers should ensure to have a reliable collateral to avoid the need for a personal guarantee.
To ensure a smooth purchase process, it is vital to include a legal practitioner like an attorney to help out in the process for transparency sake among others.
Below are some of the attributes to look out for as a seller
- The level of experience the buyer has in that industry
- The history of the buyer in terms of maintaining a business
- A business plan readily available
- Maintaining a good track record in terms of financial management
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