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How risky is selling a small business through financing?

On Behalf of | Sep 1, 2020 | Business Law

When you want to sell your small business, you might consider using seller financing to possibly increase the number of potential buyers. Fit Small Business notes that there are several advantages to offering financing for some or all of the cost of the business if the seller acts wisely.

If you want to sell your small business and extend financing to your buyer, there are a few risks that you may face with this type of transaction.

Additional debt gain

When you finance the sale of your small business, your interests remain tied to the deal because you must collect payments each month and ensure that the seller is meeting his or her responsibilities as laid out in the contract you both signed. If the buyer stops making payments and you have to collect back payments through legal means, you may incur debt that impacts the profits generated by monthly payments and interest.

Down payment financing loss

Selling your business with financing can be especially risky if you do not require a substantial down payment before approving the sale. The less of a down payment a buyer can offer, the higher your overall risk as the one who holds the financing. You might be able to reduce this risk by financing only a portion of the sale and requesting a larger down payment to better protect your interests.

Financially weak buyers

Some buyers may look for direct seller financing because their financial history prevents them from securing a loan through a bank or other financial institutions. This can present a significant risk for you if the buyer is not successful in running the business.

Strong buyers are typically those with a solid business plan and past experience in the field. Gauging your risks carefully before selling may help you avoid financing issues.