SBA 7a - Seller Note on Standby - How to convince seller?

by a searcher

1 year ago

I have seen a few posts about SBA 7a with real estate where we could structure it as a 25 year loan. I'm looking at some deals with real estate, in which case the 10% down becomes a bigger amount due to the real estate being included. A solution is to have the seller note with PIK (interest paid in kind) on standby for the duration of the loan. 

This becomes a negotiating point for conventional 10 year loans but it becomes too drastic on a 25 year loan where the seller note is on standby for entire tenure to qualify that seller note as part of the 10% down. 

Has anyone been through or looked at a deal with such a structure with a seller note as standby to offset the equity injection requirements? 

Any suggestions for how we can negotiate this for the seller to agree to this?

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lender from California State University, Sacramento - College of Business Administration

Do you have to buy the real estate? How about a first right of refusal and on buying the real estate at a later date? If the real estate isn’t crucial to the operations can you remove it from the equation to reduce the overall price?

1 year ago | like reply | 3 likes

lender from Eastern Illinois University

This is a challenging position to be in. In order to have the seller note count as equity it has to be on full standby for the life of the loan. If you have real estate involved and the real estate is greater than 50% of the deal, then you can secure a 25 year loan term on the entire deal. It is very hard to get any seller to stay involved that long. If the real estate is under 50% of the deal, then you would have an amortization between 10 and 17.5 years. This may be a bit easier for you are on the lower end of the scale.

Two other options I might suggest. Although cash flow would not be as strong as it would be with a blended amortization with both deals in the same loan, you could do the financing as two separate loans. You can use 5% seller carry on the business acquisition and then bring the full 10% down on the real estate portion. You still would have more than 5% equity in both deals, but that would solve some of your problem.

Option 2 would be to lease with an option to purchase the property and then try to execute the real estate purchase in a year or two after you have built up some equity in the property (you have a portion of lease payments be used as your down payment on the purchase) and you have more cash to put down.

If you would like to discuss you get hit me here or via email at --@----.com

1 year ago | like reply | 6 likes

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