What is the benefit of seller financing?

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

What about having multiple lenders compete for your loan?

How to Get Good Credit: "What about having multiple lenders compete for your loan?
Many Internet services and brokers allow you to submit one form and have up to four lenders review your credit information.

Credit agencies understand that these services may require an inquiry by 'multiple lenders' at the same time.

These kinds of inquiries, coming from multiple lenders within 20-30 days of each other, indicate that you are shopping for the best deal. Credit agencies will count these inquiries as being only one inquiry. This allows you to shop and negotiate the best deal without being penalized on your credit report."

How to Get Good Credit Step 3-6

How to Get Good Credit: "Step 3: Maintain only a Few Credit Cards As your credit rating improves, you will soon receive pre-approved offers from credit card companies and lenders with attractive rates and programs.

You should limit your credit to three to four cards only. Maintaining a large collection of cards can hurt your credit rating.

Step 4: Close All Retail and Gas Cards
Since you maintain three to four major credit cards (e.g., VISA, MasterCard, Discover, or American Express), it isn't necessary to hold gasoline cards, retail store cards, and other specialized credit cards.
Simply use your major credit cards.

Again, holding multiple cards can drag down your credit score.

Step 5: Don't Have Too Many Outstanding Loans
Excessive loan balances (especially loans that exceed your Debt-to-Income ratios) can effect your credit rating:

Maintaining a good credit rating requires that you reduce your debt holdings by consolidating balances, closing unused credit card accounts, and paying off outstanding loans.

Step 6: Avoid Charging Close to Your Credit Line Limit
Don't use your credit card up to your maximum credit line balance because this can negatively impact your credit rating.

Maximized credit lines (including home equity lines, credit cards and unsecured credit lines) indicate that you are a consumer who borrows willingly. Many lenders consider this a great risk and may not approve you for additional credit.

A good rule to follow is to keep your balances at or below 60 percent of the available credit line."

Bad Credit? How to Get Good Credit? Step 2

How to Get Good Credit: "Step 2: Build a Strong Payment Pattern
Adverse conditions such as late or non-payments are two of the most common items that are reported to the credit agencies. You can avoid adverse conditions by making on-time payments.
Your credit report will also list all open credit cards and loans, listing the amount borrowed and the amount owed on the account.

Your objective is to build a pattern where you pay off large credit card balances in full each month. This pattern conveys a sense of responsibility for your debt obligations.

You can build a strong payment pattern by charging everyday living expenses on your credit card, deducting the charge from your money account, and then paying off the monthly credit card charge in full each month with your money deductions.

Note that you need to follow these rules before you can undertake this credit payment pattern:

1. You must set aside funds for every credit card purchase you make.
2. You must pay your credit card balance in full each month.
3. You must have an existing credit line or home equity line (with lower interest rate) to finance large ticket items. Never finance purchases with your credit cards."

Home Equity Credits.

Home Equity Line of Credit Home Equity Loans: "Home Equity Loans
Home Equity Loans are yet another way to finance larger projects from the equity you have in your home. These are often called second mortgages (as are HELOCs), and you are allowed to borrow a certain amount no larger than the current equity you have in your home, either from principle payments or property value increases. These are standard loans with fixed rates, and they usually have to be paid back in 15 years or less. With these loans, you borrow a specific amount and have a set monthly payment.

Advantages to Financing Home Remodeling Projects with Home Equity
The average cost of a complete kitchen remodel in the United States in 2004 was $30,000. This is a big enough number that most homeowners need some type of financing, if only partially, to help cover the cost. While both Home Equity Lines of Credit and Home Equity Loans are good candidates for any remodeling project, depending on the project, one might be better than the other.

Kitchen & Bathroom Remodels
These are the two most popular home remodels. They add value to a house, and in many cases have a massive return on their investment. The problem is that estimates from contractors are exactly that, and nearly every project ends up costing a different amount—whether higher or lower—than was originally planned. You will change your mind about 100 times on which materials you want to use, the contractor will run into unforeseen problems, the market price of your materials will fluctuate, among many other things that will swing the price.

The great thing about HELOC is that it is a credit card and you are only paying interest on what you borrow. Let's say you have a $25,000 line of credit that you have earmarked for a kitchen remodel. Your contract"

Using Home Equity for Remodels.

Home Equity Line of Credit Home Equity Loans: "You have already paid all of this money in principle, and it stands to reason that you should leverage that in whatever way you can. There are two basic ways to get the most of your home equity when you are considering a remodeling project. The two smartest and most common methods of financing a home remodeling project are using your Home Equity Line of Credit (HELOC) and/or a Home Equity Loan. These two methods are often difficult to distinguish, but this article can shed a little light on which is which, while getting you on your way to a fantastic home remodel.


HELOC
So how does it work? A Home Equity Line of Credit is exactly like a credit card that you set up with your lender. You have a credit limit that is proportional to the amount of equity you have in your home. Once you have your HELOC account set up, simply advance yourself funds by writing a check. You will pay interest only on the amount you borrow, just like with a credit card. You can use your home equity line whenever you need just like the plastic you have now."

Mortgage Loan Hints

Mortgage Hints: "Don't build yourself a mortgage mountain. It's fine to want the best home you can afford, but be certain that it is comfortable affordability. Although you may find certain mortgage lenders who will stretch your qualification ratios (the ratio of your total mortgage payment to your total income) the traditional ratios--the mortgage payment as 28% of your income and the total of your mortgage payment plus your monthly debt payments as 36% of your income--are good basic guidelines.

Get your budget under control. Spending some time reviewing your budget (or developing one if you don't already have it) and sharpening your money saving skills can bring big rewards later. A coordinated budget allows you to get the most home for your money without strapping yourself while eliminating wasteful spending.

Prepare to pay off small debts. Having 3 credit card balances, for example, one with a $125 balance, a second with a $165 balance and a third with $275 balance will only cloud the picture. Even though the total is only $565, all 3 will have minimum payments, credit lines, etc. If possible, prepare to pay them down to $0 balances.

Begin to gather documentation. It is not necessary that you have all items on hand before you apply, but there are a number of documents you will need eventually and the approval process will go much smoother if you begin to gather them now. Examples: W-2's and income tax returns from the last few years (especially if you are self-employed), copies of pay stubs, a copy of your credit report (you can get a free copy of your credit report here), records of any child support or alimony (either going out or coming in) and bank statements for all accounts (checking and saving) for the last several months."

Which Type of Financing is Best for You?

Home Remodel Financing - home equity, lines of credit, & loans: "Which Type of Financing is Best for You?
Again, this is going to vary a lot on a case-by-case basis. Loans are granted based on your credit history, income, present level of debt, and securable assets. Your lender will review all of these things and use what they discover to determine what kinds of financing you qualify for. Depending on your situation, here's a list of some of the most common financing options for homeowners to use (though keep in mind this list is by no means an exhaustive one):

Cash-out refinancing. If you've built up a substantial amount of equity in your home, and interest rates have dropped since you acquired your mortgage, this can be a financial windfall. You'll pay for your project and lower rates on the rest of your mortgage to boot.

Home equity lines of credit and home equity loans. These two financing options are very similar and very popular for home improvement. Both offer financing based on the equity you've built up in your home. Because of that they usually come with very reasonable interest rates, and the interest you pay is tax deductible.

Value Added Loans. These loans are granted based on the value that will be added to your home after the project you hope to undertake is finished. It allows owners of homes that have a lot of potential to borrow more than the home is presently worth.

Homeowner Loans. This type of financing is generally based on your income rather your equity. You won't be able to borrow as much, and your interest rate will be a little bit higher, but you won't have to jump through all the hoops that equity secured loans require."