Seller Note Prepayment Incentive

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by a searcher from University of California, Berkeley - Haas School of Business
in Los Angeles County, CA, USA

1mo ago

Seller Note Prepayment Incentive

Has anyone seen or used a forgivable seller note structure to create SBA-compliant prepayment incentives for the buyer? I'd like to create a structure where the seller forgives portions of the seller note principal if the buyer meets agreed-upon prepayment hurdles. You could structure this a few different ways (e.g., $X pay-down above minimum payments, year-by-year hurdles, etc.), but I'm first just trying to understand if there's any allowable way to accomplish this.

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reply by an intermediary 1mo ago
from The University of Chicago in Chicago, IL, USA

As others have said, lenders will have difficulty accepting this structure. Few errors/oversight that I have seen in FN. 1) Make them with zero interest. I am not a lawyer, but zero interest is legal on contingent payments. Have tested this on SBA deals. If there is interest, the interest burden could be material if the FN does not kick in. 2) FN is after-tax dollar. Make sure financial model recognizes that. 3) Typically, FN is tied to growth. Working capital and CapX funding often does not leave cash to service FN. Good financial model should address this. 4) Also, if FN is forgiven, make sure it does not become an ordinary income. Happy to discuss.

reply by a lender 1mo ago
from University of Arizona in Raleigh, NC, USA

Thank you for the tag ^redacted‌, forgiveable seller notes are allowed with SBA financing, they are typically tied to performance, or customer retention etc. can you elaborate further on what your train thought is behind agreed upon prepayment hurdles?