I put an LOI on a $1M ecommerce business, and offered 30% down, with a 6% 10-year note. The broker came back and said the terms were way too low, that seller notes should be prime plus 2-3%, like SBA. Is this typically what seller financing goes for? I was under the impression it was much lower, like 6-7%. Also, what additional terms should I negotiate? Lastly, what are the real advantages if any, of getting a seller note versus an SBA loan?
In addition, seller notes are usually over a shorter time period. While there are no hard statistics on this, an average of 3- 5 years is common. As you know, the interest rate is far less important than the term specifically as it relates to the impact on the business? cash flow. As such, it would be in your interest to negotiate a longer term, even at the expense of a one or two percent increase in the rate.
Plus, you will want to include the ability to pay off the loan early and make periodic lump sum payments towards the principal without penalty. On this point, as you get into the business and things are going well, you may find yourself in a position with extra cash in the business. It is an ideal time to offer the seller to buy out the note at a discount.
SBA vs. Seller Financing
There are a couple key issues to consider:
Fees: The fees can be quite substantial with SBA backed loans although the lenders will be kind enough to build these fees into the package and finance them over the note term. However, when you need the money to complete the acquisition, the fees are a small price to pay to get into a good business.
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