In our last blog, “Should I accept financing from the seller to buy my business?”, we discussed some of the pros and cons of a buyer accepting vendor financing. This blog, on the flip side, discusses the pros and cons of vendor financing for the seller.
Benefits of vendor financing for the seller:
- Reduced delays. Some buyers cannot qualify for a loan from a financial institution, and if they can, the process of securing and then receiving the loan can take time. If you lend the purchase price to the buyer instead, this can reduce delays and increase the chances of the deal closing.
- Interest. Through vendor financing, you have the benefit of receiving the value of the company through the purchase price plus interest, and you can usually set a higher interest rate than bank rates.
- Tax benefits. By lending to the buyer, you defer income (your receipt of the purchase price), which can carry tax benefits.
- Consistent pay. If you will be unemployed once you sell your business, receiving consistent payments from the buyer over time can be a helpful form of regular cash flow.
- Peace of mind. Having a loan arrangement with the buyer will keep you connected to the buyer for some time, which can give you peace of mind that the business is in good hands.
Disadvantages of vendor financing for the seller:
- Security. It can be difficult to negotiate for adequate security for the loan, such as a mortgage, personal guarantee, registered security interest, share pledge, and/or life insurance policy. If the buyer is obtaining financing from more than one source, it can also be difficult to ensure that your security interest will come before other lenders’ security interests in the same assets.
- 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.
- Risk of default. There is a risk that the buyer will default. This becomes even more serious when the buyer defaults under another loan at the same time, and the other lender has first priority over the buyer’s assets.
When deciding whether to finance your buyer’s purchase of your business, it is best to speak with a qualified accountant and a business lawyer who can assist you with determining whether a vendor financing arrangement is right for you.
