Advice When Using Seller Financing
Advice When Using Seller Financing
When you buy a business, and use any type – including SBA – of financing for the bulk of the sales proceeds, you may want to use seller financing for some of it, related to the business’ performance after the sale. This is a good idea, often used for Accounting & Tax practices as well as other businesses from time to time. There are rules lenders impose that make sense, so here goes:
- Lenders – and SBA – do not allow you to change the purchase price after closing due to how the business did in year 1 or 2 or whatever. It messes up all the bookkeeping and lending calculations for sure.
- A Seller Note may have a balance reduction tied to performance. Lenders (and apparently SBA) have decided that does not change the price. Cool! They do not allow for the balance to go up with good performance (see #4).
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- If No. 2 above applies, it cannot be for an SBA “Standby Note” that helps lenders reduce your cash injection. Standby Notes are frozen, so you’d have to have a separate note that has performance targets, i.e. you may end up with an SBA loan, a standby note, and a “full service” note with a balance reduction clause.
- Increases in a Seller Note for good performance are a problem. SBA says NO, and conventional lenders can’t calculate an increase in debt or cash outlay (If you gave yourself the option to pay the seller more in cash), it just won’t work for lending, that’s why a maximum seller balance with targets for reduction will work.
- If No. 2 above applies, it cannot be for an SBA “Standby Note” that helps lenders reduce your cash injection. Standby Notes are frozen, so you’d have to have a separate note that has performance targets, i.e. you may end up with an SBA loan, a standby note, and a “full service” note with a balance reduction clause.
If you could start with lower debt and it “earned itself up” in balance, that would be great, but it doesn’t work for lending because it’s impossible to book the right asset value and figure out the cash flow, right?
We have encountered rare lenders that said the buyer could apply for a Credit Line after a performance period to pay the seller more, but it’s not reliable, definitely not for any SBA loans. It is mentioned here in case someone says they heard of it being done. A bank can do all kinds of things after a time for their customers.
Coffman Capital is all about solutions! Because we get these issues all the time it seemed like a good idea to tell people what we’ve learned.
Feel free to call us with questions – or enlighten us with new information – at 813-891-1811 ext 1!
Be Good, Take Care, and Keep Growing!