Your Books Won't Support an SBA Loan. Are You Willing to Carry a Note?

Your Books Won't Support an SBA Loan. Are You Willing to Carry a Note?

Once you have decided to sell your business, the first step is to organize your finances. Although this step may sound tedious, it is a vital part of the selling process.

As the seller, if you would like the Small Business Association (SBA) to support the sale and your buyer with an SBA loan, organizing your financials is crucial. An SBA loan is a government-backed loan that is offered by banks and credit unions. If a borrower defaults, the loan puts the lender at less of a risk because it is a loan that is insured by the SBA. However, in the case of an SBA loan, the lender will seek approval from the SBA and they have some stringent requirements, including:

  • A credit score of at least 690
  • No bankruptcy filings in the past 3 years
  • The buyer must be able to give at least a 10% down payment
  • For franchise businesses, the franchise fee must be paid before the loan funds are released
  • A clean criminal history
  • No current Federal debt
  • Industry or managerial business

If your buyer will not be able to secure an SBA loan because your business’s financials are not in order or do not show that the business is profitable, the buyer may not be able to move forward with the purchase. In the event your buyer is not approved for an SBA loan, you could offer seller financing and carry a note.

What is Seller Financing?

Seller financing, also referred to as owner financing, is when the business owner/seller offers a potential buyer the option to finance a portion of the business’s selling price. In this instance, the seller is acting as a “bank” and the buyer makes monthly payments directly to the seller – with interest.

As with any type of financing, there is some risk involved. The buyer should expect the owner/seller to do their due diligence to look into the buyer’s credit history to determine if they feel comfortable lending the money to the buyer. If the seller determines that the buyer is a good risk, the seller may choose to offer to finance. Expect that a lawyer or business broker will step in to draw up the paperwork with the agreed-upon terms.

As the buyer, there are some benefits of seller financing, such as fewer qualifications to meet eligibility for financing, fewer fees, reduced closing costs, increased likelihood for negotiations on the terms of the sale, and the seller has a vested interest in the business’s success and may be more willing to consult or help with the business. Seller financing also offers some benefits for the seller including advertising that the seller is offering to finance, which may increase the number of potential buyers. The seller can spread out the tax impact over the life of the loan, and because the buyer is spending less on closing costs, they may be okay with a higher selling price.

What Does it Mean to Carry a Note?

“Carrying a note” is essentially a written agreement to pay back the debt according to the loan terms (i.e., payment schedule, interest rate, etc.) in the contract. As the seller of the business, if you finance a portion of the purchase price for the buyer, you would carry a note for the buyer. You, the seller, are trusting that the buyer is going to do right by you in paying off the business sale over the allotted period.

What’s Next?

While seller financing may not be feasible for all sellers, it is something sellers should consider and be prepared for in case it comes up during negotiations. After reviewing your financial goals and overall financial situation, you need to determine what is realistic for you.

If you have questions about seller financing and what makes the most sense for you as you sell your business, we recommend consulting an experienced business broker in the San Diego area. Depending on where you are within the selling journey and your financials, our experienced advisors at Transworld Business Advisors San Diego North will recommend what makes the most sense for your situation. Contact us today!