Seller Financing – An Overlooked Source of Funding

Over the past two decades the US economic environment has been blessed with the gift of FED driven low interest rates. This trend has created a norm that has bode well for entrepreneurs that have had the capital to put down a 10-20% down payment to secure a small business loan, but has left cash-strapped starry-eyed startups with seemingly few options for cash outside of venture capital and other equity siphoning sources. This shift towards borrowed capital has created an illusory barrier to entry driven by the modern attitude to seek cheap cash loans to secure financing; a tendency that has fostered a lack of creativity among fledgling would-be entrepreneurs. Like bartering, consignment and deposits on future contracts, seller financing is a concept that has been lost in this façade.

Seller financing is a self-evident notice; the seller of the asset is the lender, and the buyer is the borrower. Instead of the borrower getting a loan from the bank, the person selling the asset lends the borrower the money for the purchase in the form of a promissory note. Much like a traditional loan, this note typically includes interest, a repayment schedule, and consequences for default. However, there are stark and not so obvious advantages to both the seller and the borrower in this model.

For the seller, the loan is being backed by a tangible asset with a guaranteed rate of return depending on the agreed upon interest, 4 to 7% in some cases … not a bad "investment" (Trulia, Contributor pg.1) . Should the borrower default, this asset returns into the seller's possession accompanied by any money that has already been paid. Likewise, during this time the seller still technically owns the asset, but is no longer liable for tax, insurance, maintenance, etc. These loans ordinarily range from 5-10 years, and with such a short time frame the integrity of the asset is generally maintained.

For the would-be entrepreneur, acquiring funding in this sense creates an opportunity for ownership without generally having to come up with a significant amount of cash up front. In fact, all terms of this loan are negotiable, and can be constructed for a new business's specific needs. The interest rate, the length of the loan, and the money up front can all be made to best accommodate both the seller and the buyer. The loan could even be supervised by performance metrics, giving the new owner the flexibility to grow the business organically.

Do not get me wrong, seller financing has not gone completely to the wayside … it just does not seem as instinctual as it once was; regulating more frequently in transactions organized by an older more experienced generation.