Seller financing is a vital aspect of business acquisitions, and it’s often a topic of interest for both buyers and sellers. But why is it sometimes necessary, and what benefits does it offer to both parties? Here, we will delve into the concept of seller financing and its importance, the advantages it presents, and an important update on SBA procedural notices.
Why Is Seller Financing Sometimes Needed?
From a lender’s perspective, seller financing may be needed due to several reasons. It helps to give the bank and the buyer secuity knowing that the seller is still committed tot he future success of the business and has skin in the game. Sometimes the buyer might lack the necessary industry or business ownership experience, creating a perceived risk for the lender. Additionally, the buyer might have limited liquidity for the down payment or post-close cash reserves. In these situations, seller financing can step in to fill the gap and facilitate a portion or all of the financing of the deal.
Advantages of Seller Financing for Sellers:
Maximizes Selling Price: Sellers may be able to obtain a higher selling price when offering to finance the deal because it opens the door for more potential buyers.
Sells Business Faster: Financing the sale can accelerate the selling process as buyers may not need to secure funds from traditional lenders depending on the situation.
Great Rate of Return: The interest the seller charges the buyer can provide a better return than other investment options.
Deferred Taxes: Seller financing may allow for an installment sale, which can spread the tax liability out over the term of the loan, deferring some taxes.
Advantages of Seller Financing for Buyers:
Business Ownership Opportunities: It allows buyers to acquire a business that might otherwise be unattainable due to financial constraints or lack of experience.
Seller Engagement: It reassures the buyer that the seller is invested in the transaction’s success, leading to increased confidence.
Legitimacy: It builds trust in the due diligence information provided by the seller.
Faster Qualification and Closing: It can expedite the transaction’s qualification and closing process.
New SBA Procedural Notice Update:
Recently, the Small Business Administration (SBA) has updated its procedural notice regarding seller financing. Seller debt can now be considered as part of the equity injection if it is on “full standby” for the first 24 months of the 7(a) loan, a significant reduction from the previous requirement of a 10-year “full standby”. This updated policy could potentially make it easier for buyers to meet the SBA’s equity injection requirements, further facilitating the usage of seller financing in business acquisition deals.
In conclusion, seller financing serves as a powerful tool in business acquisition, offering unique advantages to both buyers and sellers. It can potentially maximize the sale price, expedite the sale process, and increase opportunities for buyers, making it a valuable consideration for those involved in business acquisition deals.