It’s no secret. Commercial lending from traditional sources of financing appears to have slowed. Many of today’s business owners are finding an unexpected challenge when looking to sell their businesses because purchasers quite simply can’t access the needed cash. The principles of supply and demand suggest that while the current lack of market liquidity persists, those businesses that do change hands will do so at lower values. Other businesses that may previously have been bombarded by offers may even find themselves without any offers at all.But with any challenge there’s an opportunity. The US Small Business Association estimates that approximately 90 percent of business purchases taking place in the United States involve some type of seller financing. Perhaps this is something we should take a closer look at.What is seller financing?Seller financing (also called owner financing) is a way for a business owner to help bridge the gap between their required sale purchase and the funds available to the buyer. The seller effectively takes on the role of a lending institution by carrying the financing on a loan. Depending on circumstances, seller financing may be appropriate when used as a separate financing method, or when used in conjunction with bank financing and other sources of capital.Pros and cons of seller financingPros:The seller has the opportunity to earn interest on the money financed. These interest payments are in fact often more attractive than those that might otherwise be available on commercially deposited funds.Access to a larger pool of potential purchasers (adding those who are not able to provide 100 percent self financing). This can lead to greater chances of successful closing with a reduced period of time spent waiting for the deal to close.The buyer may feel greater emotional reassurance that the seller is not selling them a ‘lemon’, and be more willing to execute the transaction.Financing terms can be structured to better meet the unique needs of both parties than a conventional business loan. This flexibility may be particularly attractive to businesses that are seasonal or for which the cash-flows needed to pay the loan are expected to be uneven.Cons:Cash is king. There is an opportunity cost to not having the money on hand and not everybody is willing to wait.If the buyer defaults or is late on the loan repayment, the seller may struggle to recover ‘full value’. Foreclosure can be costly, time-consuming and has other hassles.Although the seller may be able to recover the business assets during foreclosure, the buyer may have significantly damaged the business’ assets and reputation.Interest payments on the amount financed are intended to address concerns about opportunity cost and the lending risk. However the terms of the agreement may not attach appropriate returns if the various risks have been inappropriately assessed. This can happen with a seller who is overeager to close the deal.Tips for seller financing successHave your professional advisers explain in plain language the implications of various deal structures and the appropriateness of different risk mitigation measures.Ensure that the buyer has some ‘skin in the game’. Sellers would be well advised to structure the deal such that a buyer cannot simply ‘drop their tools and walk away’ without paying a penalty.Obtain collateral or a guarantee from another source, if possible.Essentially, both sellers and buyers want the same thing. They want to make smart financial decisions, resulting in returns appropriate to the level of risk undertaken. Combining transparency, appropriate deal structure and risk mitigation will allow us to more effectively complete business purchase/sale transactions even in today’s environment, where availability of debt capital has been reduced.If you’re actively looking at selling your business or examining deal structure options for a potential business purchase/sale transaction, please e-mail kumi@firmadvisory.com or call 441 295-3301.Kumi Bradshaw, CBA, BVAL is President of Firm Advisory Ltd. Firm Advisory Ltd. provides business valuation, business brokerage and advisory services.