Should I accept financing from the seller to buy my business?

If you would like to buy a business but are having difficulty securing a traditional loan from a bank or credit union, you might consider negotiating with the seller for vendor financing. Vendor financing is an arrangement where the seller agrees to loan some or all of the purchase price to the buyer, and it is an arrangement that can be both beneficial and costly for the buyer. Benefits of vendor financing for the buyer: 

• Extra financing. Borrowing from the seller can increase your chances of receiving a second loan from your bank. Your bank may see the seller’s willingness to loan money to you as an indication that the business you are buying is profitable and that you will be able to repay a loan.

• Security. If you borrow from the seller to make a purchase and you discover, after the deal closes, that the seller was not truthful about certain aspects of the business, you may be able to offset your losses from the balance of the loan.

• Support. A seller who has financed the sale of its business will have a vested interest in the company’s ongoing success and will be more likely to support the business through its transition by introducing the buyer to clients and contacts, offering training, and sharing key knowledge about the business.

Disadvantages of vendor financing for the buyer:

• Interest. Vendor financing is usually granted at a higher interest rate than what would be offered by a financial institution.
• Seller security. The seller will likely insist that you secure the loan by granting a mortgage, personal guarantee, registered security interest, share pledge, and/or a life insurance policy. If you miss a payment, you risk losing control or ownership of the business or of your personal property. Keep in mind, though, that most lenders, including your bank, expect security.
• Negotiating. Although vendor financing can help avoid delays that would come from waiting for traditional financing, it can also cause delays by adding another arrangement and more terms to the deal to negotiate.
• Default. If you have financing from both the seller and your bank, a default under one loan might put you in default under the other.

When deciding whether to negotiate with the seller for vendor financing, it is best to speak with a qualified accountant and a business lawyer who can assist you with determining whether vendor financing is right for you.