Here's how seller financing works. As part of the deal to sell a business, the seller agrees to finance a portion of the sales price over a specified term at a specified interest rate. The buyer pays a down payment upfront, and continues to make payments according to his agreement with the seller. To secure his investment, the seller takes a lien against the business until the balance is paid in full.
Keep in mind that seller financing isn't an act of charity toward the buyer. It is a business decision with all the benefits and risks of any other business decision.
The Benefits
The benefits of seller financing can be significant for both the seller and the buyer. First, it gives a buyer who might not meet the stringent requirements of a commercial lender the ability to purchase your company. That's good news for the buyer.
But, it's also good news for the seller, because in return for the seller's willingness to finance the deal, the buyer is willing to pay a higher price for the business than he might have been had he financed it through a bank. In fact, statistics have shown that seller financed deals typically have a 15% higher sales price than those that are commercially financed.
A higher sales price may seem extortionist, but it isn't. The fact that the seller is willing to finance the deal gives the buyer confidence that the business is viable and profitable.
The other big benefit of seller financing is that the seller continues to profit from the sale through interest. It is not unreasonable to expect the interest payments to effectually double the sales price in less than ten years.
The Risks
Obviously, seller financing does entail a certain amount of risk, especially for the seller. The biggest risk is that the business will fail before the buyer makes full repayment. True, the seller holds a lien on the business, but in many cases the lien doesn't provide enough security for the full loan amount. To mitigate this risk, many sellers require additional forms of collateral such as a lien on the buyer's personal residence.
Another associated risk is that the seller could potentially end up owning the business again if it fails. This may seem like a negligible risk because it doesn't necessarily involve a financial loss for the seller. However, it means the seller runs the risk of being actively involved with the business for a far longer time period than he/she may have intended. Even though this probably won't happen, the seller needs to prepared to be attached to the business until the repayment term has come to completion.
Article Source: http://www.gaebler.com/Seller-Financing.htm
"Substantial savings in closing costs for both buyer and seller. The parties can also negotiate the interest rate and the repayment schedule, as well as other conditions of the loan. The buyer can request special conditions of the purchase, such as the inclusion of household appliances or even vehicles. Also, the borrower does not have to qualify with a loan underwriter. And, unless negotiated, there are no PMI insurance premiums.
On the seller’s side, he or she could receive a higher yield on their investment by receiving their equity with interest. The seller could also possibly negotiate a higher interest rate than could be received on other types of investments. A higher selling price could also be obtained as compensation for assisting the buyer with financing. The property could be sold “as is”, thus eliminating the need for costly repairs that conventional lenders would require.
The seller could screen the buyer for creditworthiness and the ability to pay, and could also require the buyer to purchase a PMI policy to protect the seller against default. The seller could also choose which security document (mortgage, deed of trust, land sales document, etc.) to best secure his or her interest until the loan is paid. " -by jamaine12
"Contracts For Deed (seller financing) are becoming all the rage again. This is due in large part to the contraction in traditional credit markets.Among the benefits to the buyer is that credit requirements are likely to be more relaxed. Among the risks are the possibility of being evicted much more quickly than under a traditional mortgage agreement.Among the benefits to the seller is that they may not have to wait as long to sell their property due to these more flexible terms. Among the risks is that the seller may be in violation of their original mortgage contract's "Due On Sale" clause. Of course, very few lenders would accelerate the loan in the current market if payments were timely and current." -by Scott D - ex-QnA
"Seller financing offers benefits to both buyers and sellers including tax breaks for the seller as well as offering an alternative when conventional loans can't be found. The risks involved are the same risks facing any lender. Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it? Sellers should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that should be met. "- by Real Estate Guy
Article Source: http://www.answerbag.com/q_view/893
