Can Vendor Financing Help Me Sell My Business?
Vendor financing is a loan agreement usually between a business and a vendor. The vendor is generally one that supplies a significant amount of product to the business. It occurs often where there is a positive and longstanding relationship between the business and the vendor. However, this type of arrangement is becoming more popular among small business owners and buyers.Vendor financing is practically unheard of when selling a large business. It’s just not something that’s generally done. However, some small business owners are open to vendor financing. You may or may not think it’s right for your situation.With vendor financing, you (the seller) and the buyer agree on a price. The price is one you agree on mutually, and it’s not necessarily your original asking price. The buyer pays you an agreed upon portion of the cost. For instance, the buyer might pay you $100,000 for a $200,000 business.
The buyer then agrees to pay the remaining $100,000 on an agreed upon schedule. Interest is also included, and is negotiable. If the arrangement goes as planned, you eventually get all of your money plus the interest.
Of course, things don’t always go as planned.
It’s possible the buyer will fail to repay the loan. It’s important to include a clause stating you get your business back if the buyer fails to pay. The business might be in worse shape than you left it, but at least you’ll have something to work with.
Vendor financing is risky. You must be comfortable before making this type of arrangement.
Comfort with the buyer is an absolute must. After all, you’re giving this person money to buy your business. You’ll want to interview the buyer, and learn everything you can about them. Get references, do a background check and run a credit check. If anything makes you uneasy, then consider passing on the arrangement.
Vendor financing isn’t the best situation. You want a buyer who can buy your business without borrowing money from you. However, financing the sale is possibly better than not selling your business at all. That is one reason why vendor financing is popular with small business owners. If you actually finance the purchase, then it increases your chances of selling the business.
You (as the seller) and the buyer can both benefit from vendor financing.
You’ll attract more potential buyers if they know financing is an option. This, of course, means you’re more likely to sell your business. The buyer might even agree to a higher price if they’re sure they can get financing. You’ll also gain interest on the loan, and enjoy the monthly payments.
The buyer benefits because they can purchase a business without approaching a bank. It’s not always easy for small business owners to get financing. By providing vendor financing, you remove a major obstacle. The buyer can also use business profits to repay the loan, which makes things easier for the buyer.
If all goes well, vendor financing is a win situation for everyone involved. Just make sure the agreement is very specific. Specify the repayment terms, the interest rate, the amount of the loan and what happens in the case of a default. Cover your bases so you don’t lose in the end.
Vendor financing can work, but it requires careful planning.
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