The buyer won’t always have enough money to pay for your supermarket. In such a case, vendor financing could be your saviour of sorts in that it can help close the transaction successfully at your expected time. The practice is not without its share of risks however, so the decision to engage in it must be as informed and well-deliberated as possible.
Vendor financing or seller financing is when you extend your buyer a loan to pay for a portion of your business’ sale. For example, you sold your store for $100,000 and your buyer had only $60,000. You can lend them the remaining amount, including interest, payable within a certain period of time.
Seller financing is often a short-term loan. After all, you probably wouldn’t want to wait 30 years just to get your money back, right? Payments are usually given in instalments which, depending on your agreement with the other party, could include the interest.
Weighing the pros and cons
What separates vendor financing from other types of lending schemes is the absence of the middle man. In most cases, “middle man” refers to banks, lending institutions and third-party funding providers. This means that the transaction is purely between the seller and the supermarket buyer. Aside from making things a lot less complicated for you, this arrangement also means:
- You have greater control over the transaction. Vendor financing helps you ensure the best outcomes from the business sale. By contributing to your purchaser’s finances, you can raise your chances of successfully closing the transaction. You may even be able to take advantage of your buyer’s eagerness to acquire your supermarket and raise your asking price a little.
- You will possibly earn more. At the end of the day, vendor financing is a form of debt, so it inevitably comes with interest. The interest you will ultimately get will depend on your agreement with your buyer. The interest payments allow you to obtain profit long after you have actually sold your business.
- The sale closes faster. Securing loans from banks and lending institutions can be time-consuming and as such, can cause the business sale to drag too long for your comfort. Financing your buyers means that you can move out when you want to and spend time doing what you want or running your dream business.
- You don’t spend more because of the middle men. Some lending institutions approve loans only when they are sure that a debtor can pay them back. That said, they can check your store and may even demand that you do repairs to improve profitability before they approve your buyer’s loan. This means additional expenses that you can avoid by removing the middle men from the equation.
- Your business becomes attractive to more buyers. Some buyers understand what great investments established supermarkets and convenience stores are. It’s just that they don’t have money nor funding from banks and lenders. Vendor financing lets you leverage on these buyers’ desire for an investment and offer an excellent business opportunity they can take despite their financial situation.
On the other hand, vendor financing may also expose you to the following risks:
- The purchaser may abandon the sale altogether. Some buyers do not have reliable long-term financing sources. These buyers may not be able to push through with the business sale, even after you have extended your assistance. That said, they may pull out of the deal before they complete their payments.
- You may have to take back your property. There are several reasons why this can put you at a disadvantage. If you have plans for after the business sale, you may have to forego them to focus on selling your business again. This means additional costs as you lose not just money but also time you could have spent on your new ventures. Additionally, there is a good chance your business may be returned to you in worse condition than when you sold it. Naturally, this means you either have to spend for repairs or sell your business at a lower price.
Vendor financing is a solid financing option which can secure the success of your supermarket’s sale when used strategically. But it is also in vendor financing where, more than ever, you have to carefully screen your prospective buyers. Examine their ability to purchase your business or pay off a loan in the instance that you do help them out. If you find it hard to make a decision, do not hesitate to get your accountant or business broker’s opinion.
As a business seller, would you extend vendor financing as an option to your buyer? Why? Tell us in the comments below.