When financing the acquisition of a business, banks typically require 20-25% equity to extend a conventional loan. Don’t let equity shortfall blow the deal! Consider offering seller financing to bridge the gap.
If a Buyer qualifies for a SBA loan, seller financing qualifies as “equity”. Structuring the sale transaction with a combination of buyer equity, plus a seller note, may satisfy the equity requirements to make a SBA loan work for Bank financing. Because banks want borrowers to have some liquidity and inject some of their own assets as equity into a business, buyers should come up with at least 10% equity for the acquisition.
As for seller financing, seller can charge a nice rate of interest for a term agreeable to buyer, but in order to qualify as “equity” for a SBA loan the seller note must be on full standby for two years. This means interest on the seller note can accrue, but no P&I payments can be made to the seller during the first two years of the SBA loan. The seller is free to negotiate the terms of the seller note with buyer, including the interest rate. The bank will require documentation of the seller note, including all terms of repayment, as well as a subordination of the seller note to the bank loan.
Providing seller financing to a buyer securing bank financing can prove beneficial to all parties. The buyer gets to acquire the business they see as their future and have confidence in the business’ ongoing success. The seller gets the business sold at the price it wants and can pursue other opportunities or retirement. The majority of the purchase price is paid by bank financing upfront at closing, and the seller enjoys a continuing stream of payments on the seller note, at a beneficial rate of interest, over time following the sale. By offering a desirable financing option to prospective buyers in the form of a seller note, sellers can often command a better selling price and may also see additional financial advantages through tax breaks and interest accrual. It is also possible that the seller note can be refinanced with a SBA loan by the Bank after the two year period has passed.
If the buyer and seller can be flexible, consider a seller note to combine with a SBA loan to finance the sale of your business and achieve a mutually- beneficial option for everyone.