Seller Financing Issues

Seller financing occurs when a Seller decides to act as the Lender for a business transaction and executes a Promissory Note instead of receiving the full Purchase Price from the Purchaser at Closing. The reason for using Seller financing usually stems from the inability of a Purchaser to secure lending for the transaction.

A Lender may refuse to provide funding for the Purchase, when the Purchaser lacks adequate credit, lacks adequate collateral, or for other reasons. In order to complete the transaction , the Purchaser may request that a Seller finance a portion of the Purchase Price wherein the Seller becomes a Lender in the transaction.

However, there are a number of issues to be aware of before a Seller should agree  to finance a business transaction..

First, a Seller should consider why the Purchaser could not secure financing from an accredited Lender of banking institution in the first place. If the reasoning was that the Purchaser lacked creditworthiness, then the Seller should be hesitant to enter into a long-term loan with the Purchaser who does not have a great, established history of paying debts as they are incurred. If the Purchaser lacked collateral, the Seller should consider what assets of the Purchaser that the Seller could attach a lien or UCC to in order to secure the loan.

Second, the Seller should consider their own financial standing as to whether or not they can afford to extend the payment of the Purchase Price over a long period of time.. If the Seller is a sole business owner and sells its only business to the Purchaser, then the Seller has lost their sole source of income or salary. Delaying payment of the Purchase Price could put a strain on the Seller financially. Also, the Seller could utilize the proceeds from a sale to finance or purchase another business or invest elsewhere. It wouldn't make sense for the Seller to delay their own plans due to a failure of the Purchaser to secure financing.

If a Seller decides to offer Seller financing, the Seller needs to make sure to hire an experienced attorney that can prepare the appropriate documents, assist in securing the loan, and conduct lien and UCC searches on the Purchaser's potential assets. Please call Kapadia & Naik at 770-881-8081 if you need assistance in any business transaction, regardless of the status of financing.