Ins and Outs of Seller Financing (SF) or Seller Carry Note (SNC)

This is the traditional financing method prevailing from the olden days. In the seller financing transaction, the seller is also acting as a lender for the purchase of a business or transfer of ownership. The reasons why prospects opt for this method is that lender financing will take longer than seller financing, and in the seller financing transactions, the seller is sharing the business risk after the close of escrow. This is good for the buyer. Also, as this method allows for closing the escrow faster than a lender loan, the buyer can take the seller’s advice from time to time if there is any drop in sales. The seller assistance to the buyer is one of the greatest assets to the buyer as the seller built the business.

The following are the most common requirements for seller financing (SF) or seller carry notes (SNC) or security agreement (SA) in America.

Higher Down Payment

• The seller will ask the buyer to put at least 50 to 60% of the purchase price down i.e. low to value (LTV) will be 40 to 50%
• Seller demands for monthly payments, interest rates, amortization period are realistic in nature as the seller knows the business returns to support the payments
• Seller files UCC or lien on the business and business assets such as fixtures, equipment, inventory and all other tangible assets.
• Seller can also put a lien on the licenses/permits

Lease Reassignments

• This is a part of an agreement with the buyer and landlord. It states that in the event the buyer fails to make the payments and the seller decides to take back the business, the buyer and landlord have to allow the seller to take the position of the business and allow them to take over the existing lease. This has to be written as a separate contract, and such a contract has to approved and acknowledged by the buyer, seller and landlord before attaching to the note or security.

License and Permits Reassignments

• This is a part of an agreement for the seller carry note with the buyer in the event that if the buyer defaults on the mortgage payments, all or some of the buyer licenses shall revert back to the seller without successor liability.

Late Fee

• The seller will put a clause in for late fees if the buyer pays the monthly mortgage payments late beyond the stipulated time.

Alienation Clause

• In the event that the buyer sells the business to a third party or changes title or ownership to a third party, the seller can demand full payment of the loan amount before making any changes.

Additional Collateral

• The seller may ask for additional collateral, such as buyer real estate and assets to minimize the risk to the seller.
• Mostly, all these security agreements or seller carry notes are prepared by escrow companies with a standard format. In the best interest of the seller and buyer it is a good idea to hire an attorney to prepare the terms and conditions for seller carry note or security agreement. They can prepare it with better legal wording to protect all parties.

If you want to know more about seller financing or have further questions on seller financing related options, please contact us at info@bizworldusa.com or 510-556-1600 and one of our approved third-party business financial consultant professionals will contact you.