SBA loans are an attractive alternative to conventional bank financing because borrowers can use SBA loans to accomplish lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans. Sometimes, however, a small business can fall just a big short in qualifying for SBA financing for a business or small business real estate property. That’s where seller second lien financing can help.
It can be challenging for new businesses to qualify for the 10% down payment financing through an SBA loan. Through seller second lien financing, the lender agrees to allow the seller to hold a second mortgage on the property. This gives the lender more qualifying equity in the property as collateral since the seller is carrying some of the financing.
Why would a seller of a business, or a seller of business real estate agree to carry second lien financing on a standby basis? In some cases, the seller is eager to sell the business property as soon as possible and there are many benefits provided for sellers willing to carry a small amount of second lien financing.
The seller signs a SPA Standby Agreement and agrees to:
- Be the second lien
- Not take payments until the SBA loan is satisfied first
- Earn interest at the rate agreed upon between the buyer and seller
In return, the seller is able to:
- Delay income tax liability
- Receive a good rate of return for the note
- Sell much more quickly
- Receive 90% of the sale price in cash
Seller second lien financing is a win-win for both the buyer and seller. The lender likes to see second seller lien financing because the seller is still invested in a creating a smooth transition of property ownership. And the seller enjoys second seller lien financing because they can avoid further price negotiations on the property and earn interest.