No Money Down Seller Financing

What if you don’t have a big down payment? The broker says the SBA wants 20% cash down and you only have $25,000? What if you only have less than 5%?

Well, I have some amazing news for you. It may be possible!

No Pollyanna, it is not easy.  But some have done it and it is being done every day, somewhere in the USA.  Surprised?

First, let’s intrude on the world of banking. They are the ones you have to convince to lend you, say 80% of the purchase price of a business. Let’s say the price is $2.5 Million with $600,000 adjusted cash flow, sometimes called EBITDA, meaning ‘what remains after business expenses, what is left over for you!” (EBITDA stands for Earning Before Taxes, Interest, Depreciation, and Amortization).

That leaves 20% that you don’t have. Second, let’s do some math.

What is Debt Service on Two and One Half Million Dollars?

Let’s assume 5.45 interest and a Ten-Year Loan.  That is about $28,000 a month.  Whoa! That’s a lot of debt, right? Guess what? The bank is not going to lend you 100%. Can you blame them?  But then you do this math: $28,000 x 12 months is $336,000.  What was the free cash flow after expenses?  It was $600,000, right? 

So, it doesn’t take a math genius to use the calculator on your iPhone and see that $600,000 less $366,000 leaves you with a sweet $264,000 profit.  That is, if you put no money of your own into the deal and it was all OPM (Other People’s Money).

This is just an over simplified illustration. Many factors are omitted for purposes of this simple illustration. Interest rates and number of years vary, and things go wrong that could affect the business having a true $600,000 net, etc.

No Money Down Seller Financing

So, where do you go for the remainder of the 80% that you don’t have? You ask the Seller, the Owner of the business to carry a Seller Financed Note. How much will he carry? The answer is, “That depends”. Maybe the answer is zero.  If that is the case, you are out of luck.  Move on. But usually, especially in today’s crazy financial world, if he is a motivated Seller, it is 5,10-20%.

Warning: The Devil is in the Details

It is one thing to start with, ‘The Listing says 10% down’, it’s another to have that business owner approve you and your offer.

He must feel (1) enough confidence in his own business that it will continue to generate profits and net $600,000 and (2).it can do so under your management as a new owner. He will also look hard at your Financial Statement just as any Lender would do.

Here is where having someone in your corner to advise you, speak up for you, assure the Owner, is so terribly vital. The Selling Broker may help somewhat, but the Seller knows the broker wants to get paid his commission. A Buyer’s Representative, Buyer’s Rep. if you have one, is your best shot for getting the ball over the 5-yard line.  

Are You Kidding? Really? Buying a Business with NO Money Down?

It happens. But the odds are against it. You see, the Lender, the bank loaning 80%, they want to see ‘skin in the game’. In today’s near-zero Fed Rate to the bank, they would surely want to lend at 5.75%. That is if you qualify. And it is not uncommon to see another 10% of Seller Financing. In a few cases, 15%, and that leaves only 5% remaining for you the Buyer out of pocket.

Buying a Business with NO Money Down

So, how do we get around this last obstacle? Again, it does happen, I’ve seen it. Now, to be clear, if you don’t have more than $25,000, as we started this illustration, with the bank funding 80% (and holding all the equity) getting the Owner to hold 100% of the remaining 20%, with no collateral, is a nonstarter.

So, don’t start there! Start with only positives and save the tough part until after you get to First Base at least.

Here’s how it happens: It requires a Seller who is highly motivated.  Second, he has to really like you. Perhaps he has had 20 tire kickers before you, he is exhausted and besides, you come across as nearly perfect!

What is the Work Around?

The last time I helped a client with less than 5%, he had less than 1% actually. What I suggested was to raise the price. He offered a premium over the asking price.  Assuming the math allows it, in this illustration, he might have offered $3,000,000 instead of $2.5M.  You can see how the Seller mitigated the risk and how the buyer took a haircut on net income after the new combined debt service. But he did it with no money down and was more than $100,000 to the good.  Free Money he called it, although he had to work extra hard to stay afloat. 

Another workaround is to get the Seller to privately lend the Buyer the 5% to satisfy the bank and give it back at closing. This is not okay with most banks, but private parties who really want to close a deal are free to negotiate any workaround they both agree to. As a Consultant, I advise proper disclosure to the Lenders, of course.

How long will it take to pay a $2,500,000 loan?

This calculator shows how long it will take to pay off $2.5M in debt. It can be used for any loan, credit card debt, student debt, personal, business, car, house, etc…

Many times, combining multiple high-interest loans into one low interest loan can be a good option. This is called debt consolidation.

Loan Payoff Over Time

MonthPaymentPrincipalInterestBalance
128,000.0016,020.8311,979.172,483,979.17
228,000.0016,097.6011,902.402,467,881.57
328,000.0016,174.7311,825.272,451,706.83
428,000.0016,252.2411,747.762,435,454.59
528,000.0016,330.1111,669.892,419,124.48
628,000.0016,408.3611,591.642,402,716.12
728,000.0016,486.9911,513.012,386,229.13
828,000.0016,565.9911,434.012,369,663.15
928,000.0016,645.3611,354.642,353,017.78
1028,000.0016,725.1211,274.882,336,292.66
1128,000.0016,805.2611,194.742,319,487.40
1228,000.0016,885.7911,114.212,302,601.61
1328,000.0016,966.7011,033.302,285,634.91
1428,000.0017,048.0010,952.002,268,586.91
1528,000.0017,129.6910,870.312,251,457.22
1628,000.0017,211.7710,788.232,234,245.45
1728,000.0017,294.2410,705.762,216,951.21
1828,000.0017,377.1110,622.892,199,574.10
1928,000.0017,460.3710,539.632,182,113.73
2028,000.0017,544.0410,455.962,164,569.69
2128,000.0017,628.1010,371.902,146,941.59
2228,000.0017,712.5710,287.432,129,229.02
2328,000.0017,797.4410,202.562,111,431.57
2428,000.0017,882.7210,117.282,093,548.85
2528,000.0017,968.4110,031.592,075,580.44
2628,000.0018,054.519,945.492,057,525.93
2728,000.0018,141.029,858.982,039,384.90
2828,000.0018,227.959,772.052,021,156.96
2928,000.0018,315.299,684.712,002,841.67
3028,000.0018,403.059,596.951,984,438.62
3128,000.0018,491.239,508.771,965,947.38
3228,000.0018,579.849,420.161,947,367.55
3328,000.0018,668.869,331.141,928,698.69
3428,000.0018,758.329,241.681,909,940.37
3528,000.0018,848.209,151.801,891,092.16
3628,000.0018,938.529,061.481,872,153.65
3728,000.0019,029.268,970.741,853,124.38
3828,000.0019,120.458,879.551,834,003.94
3928,000.0019,212.068,787.941,814,791.87
4028,000.0019,304.128,695.881,795,487.75
4128,000.0019,396.628,603.381,776,091.13
4228,000.0019,489.568,510.441,756,601.57
4328,000.0019,582.958,417.051,737,018.62
4428,000.0019,676.798,323.211,717,341.83
4528,000.0019,771.078,228.931,697,570.76
4628,000.0019,865.818,134.191,677,704.95
4728,000.0019,961.008,039.001,657,743.96
4828,000.0020,056.647,943.361,637,687.31
4928,000.0020,152.757,847.251,617,534.56
5028,000.0020,249.317,750.691,597,285.25
5128,000.0020,346.347,653.661,576,938.91
5228,000.0020,443.837,556.171,556,495.07
5328,000.0020,541.797,458.211,535,953.28
5428,000.0020,640.227,359.781,515,313.06
5528,000.0020,739.127,260.881,494,573.93
5628,000.0020,838.507,161.501,473,735.43
5728,000.0020,938.357,061.651,452,797.08
5828,000.0021,038.686,961.321,431,758.40
5928,000.0021,139.496,860.511,410,618.91
6028,000.0021,240.786,759.221,389,378.12
6128,000.0021,342.566,657.441,368,035.56
6228,000.0021,444.836,555.171,346,590.73
6328,000.0021,547.596,452.411,325,043.15
6428,000.0021,650.836,349.171,303,392.31
6528,000.0021,754.586,245.421,281,637.73
6628,000.0021,858.826,141.181,259,778.91
6728,000.0021,963.566,036.441,237,815.35
6828,000.0022,068.805,931.201,215,746.55
6928,000.0022,174.555,825.451,193,572.00
7028,000.0022,280.805,719.201,171,291.20
7128,000.0022,387.565,612.441,148,903.64
7228,000.0022,494.845,505.161,126,408.80
7328,000.0022,602.625,397.381,103,806.18
7428,000.0022,710.935,289.071,081,095.25
7528,000.0022,819.755,180.251,058,275.50
7628,000.0022,929.105,070.901,035,346.40
7728,000.0023,038.974,961.031,012,307.44
7828,000.0023,149.364,850.64989,158.08
7928,000.0023,260.284,739.72965,897.79
8028,000.0023,371.744,628.26942,526.05
8128,000.0023,483.734,516.27919,042.32
8228,000.0023,596.264,403.74895,446.07
8328,000.0023,709.324,290.68871,736.75
8428,000.0023,822.934,177.07847,913.82
8528,000.0023,937.084,062.92823,976.74
8628,000.0024,051.783,948.22799,924.96
8728,000.0024,167.033,832.97775,757.93
8828,000.0024,282.833,717.17751,475.11
8928,000.0024,399.183,600.82727,075.93
9028,000.0024,516.093,483.91702,559.83
9128,000.0024,633.573,366.43677,926.26
9228,000.0024,751.603,248.40653,174.66
9328,000.0024,870.203,129.80628,304.46
9428,000.0024,989.373,010.63603,315.08
9528,000.0025,109.122,890.88578,205.97
9628,000.0025,229.432,770.57552,976.54
9728,000.0025,350.322,649.68527,626.22
9828,000.0025,471.792,528.21502,154.43
9928,000.0025,593.842,406.16476,560.58
10028,000.0025,716.482,283.52450,844.10
10128,000.0025,839.712,160.29425,004.40
10228,000.0025,963.522,036.48399,040.88
10328,000.0026,087.931,912.07372,952.95
10428,000.0026,212.931,787.07346,740.01
10528,000.0026,338.541,661.46320,401.48
10628,000.0026,464.741,535.26293,936.73
10728,000.0026,591.551,408.45267,345.18
10828,000.0026,718.971,281.03240,626.21
10928,000.0026,847.001,153.00213,779.21
11028,000.0026,975.641,024.36186,803.57
11128,000.0027,104.90895.10159,698.67
11228,000.0027,234.78765.22132,463.89
11328,000.0027,365.28634.72105,098.61
11428,000.0027,496.40503.6077,602.21
11528,000.0027,628.16371.8449,974.05
11628,000.0027,760.54239.4622,213.51
11722,319.9522,213.51106.440.00