Seller financing may be the difference between getting your best deal done and losing your best buyer. A willingness to carry a note provides an alternative when traditional financing falls short and serves to reassure a buyer that the seller has faith in the continued success of the company. For the seller, owner financing can result in a higher overall price and steady income with interest. With that in mind, sellers also take on a risk by agreeing to finance the sale. Collateralizing a seller financed note is a commonly used tactic to more evenly distribute the risk between buyer and seller.
If you’re going to perform the services of a bank, you have the right to behave like one. Requesting the buyer’s credit report will provide a more informed picture of their repayment abilities. Take the time to thoroughly investigate a buyer’s history. Has he previously owned or managed a business? Does he have knowledge of typical medical transportation expenses? Not only will lending to a risky borrower threaten your post-sale security, but it can decrease the price you receive for your business note if you later need to sell the loan.
While it may be possible to use personal assets to secure the loan, the most common form of collateral is the business itself. But getting a business back is not always advantageous to the seller. By the time a buyer defaults on your loan, your business may be in pretty poor shape. Setting benchmarks for financial performance can allow a seller to quickly reclaim his former business if it begins to deteriorate. This provides additional motivation for the buyer to succeed, as losing the company would mean losing the down payment and any business expenses already incurred.
Determine Rates and Terms
Many owners of an ambulance service for sale mistakenly believe they have the freedom to charge an outrageous interest rate. In reality, rates will probably be similar to those paid on traditional bank loans. Keep in mind that seller financing is generally used to bridge the gap between the purchase price and what a buyer can obtain from a traditional lending source. Most buyers are already willing to pay a higher price for a deal with seller financing. Requiring a steep interest rate could be too much for a seller to manage. It’s also imperative to develop contract language that defines terms of the agreement. What late fees will be applied if the buyer misses a payment? When will they be applied? How will attorney’s fees for drawing up the agreement be covered?
Work Out the Security Agreement
Collateralizing a loan protects your best interests. But if that collateral isn’t listed in the security agreement along with your rights of enforcement, you won’t have a legal leg to stand on. A lien must be “perfected” in the agreement to establish your rights to assets over third parties like creditors. Where and when this documentation is filed may vary depending on local laws. A professional transaction attorney can equip sellers with the assistance and legal advice to form a sound seller-financed note. By protecting yourself and your company, you also protect your purchase price.