What are the drawbacks of seller financing for a business sale?

On Behalf of | Feb 14, 2022 | Firm News |

Business seller financing can offer several different conveniences for both the buyer and the seller. Business.com reports that this type of financing removes third-party interests and allows both parties to communicate directly.

While seller financing can streamline the sale of a business, both interested parties may want to remain aware of a few drawbacks that may result in financial pitfalls and affect the future of a business.

Greater financial risk

When the buyer and seller of a business enter into a contract directly, both may face greater financial risk when compared to a more traditional sale that includes a bank lender. The seller may fail to make agreed-upon payments, which impacts the seller, or the seller may want to remain involved with the property, which can limit the buyer when starting his or her business.

A lack of capital investment

Those who choose to offer owner financing may find that it limits their ability to reinvest in their own business because of the financing terms or may miss other investment opportunities because their money remains tied up with the ongoing financing of their previous business.

Buyer default

When business sellers offer direct financing, they must make wise decisions and examine the risks carefully to avoid choosing a buyer who may have a higher chance of defaulting on the loan. When this occurs, sellers must then spend time and effort recovering the money, which can leave them in a financial deficit.

Many small business owners offer seller financing because of the ease of the transaction. This is likely also due to smaller overall loans that make it easy for both the buyer and the seller to handle the transaction.