Interest rate for Seller Financing / Deferred Payments - Rates bechmarks?
What is a good range for the interest rate for seller financing/differed payments in the current conditions?
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by a searcher
from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School
in Toronto, ON, Canada
in Toronto, ON, Canada
5yrs ago
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by a searcher
5yrs ago
in Seattle, WA, USA
in Seattle, WA, USA
Situations vary.
We accepted 20% recently due to an 11th-hour private financing shortfall because it kept the deal together.
The seller did not wish to finance so asked onerous terms to ensure accelerated payment. The terms were acceptable because I knew the gap to additional financing would only be a couple of months.
We accepted 20% recently due to an 11th-hour private financing shortfall because it kept the deal together.
The seller did not wish to finance so asked onerous terms to ensure accelerated payment. The terms were acceptable because I knew the gap to additional financing would only be a couple of months.
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by an intermediary
5yrs ago
from The University of Chicago in Chicago, IL, USA
from The University of Chicago in Chicago, IL, USA
1. Seller financing is a "Price Preservation" concept. Interest rate on seller financing is not an independent variable as is often treated. Let me explain the theory.
2. Seller wants the maximum price. The more the buyer can borrow and service the debt while getting the ROI on buyer equity, the higher the price to seller. However, lenders often put a cap on lending (due to low assets, tighter credit market, in high CF deals, or smaller deals, lender - and also buyer - wants to see seller's skin in the game, etc.). If bank lending is less than what the business CF can support, then there is a "Gap" between what the maximum debt that the business CF can support and the available debt from a bank. This "Gap" can be fill two ways; a) buyer puts up more equity. If buyer increases equity equal to the "Gap", the price will be preserved, but buyer ROI will decline. If buyer increase equity to less than the "Gap", the ROI can be preserved, but the total price to seller will decrease. Or, b) Seller steps in place of the bank and fills the "Gap" with seller financing. In this case the price is preserved to what the business CF can support. Hence, seller financing is a "Price Preservation" concept (provided the interest on seller financing is the same as that of the bank.
I cover this and many other such topics when I teach. For example, does higher growth mean more value? Does lower ROI mean higher price? Some of you have gone through the class and know the tools for such analysis.
2. Seller wants the maximum price. The more the buyer can borrow and service the debt while getting the ROI on buyer equity, the higher the price to seller. However, lenders often put a cap on lending (due to low assets, tighter credit market, in high CF deals, or smaller deals, lender - and also buyer - wants to see seller's skin in the game, etc.). If bank lending is less than what the business CF can support, then there is a "Gap" between what the maximum debt that the business CF can support and the available debt from a bank. This "Gap" can be fill two ways; a) buyer puts up more equity. If buyer increases equity equal to the "Gap", the price will be preserved, but buyer ROI will decline. If buyer increase equity to less than the "Gap", the ROI can be preserved, but the total price to seller will decrease. Or, b) Seller steps in place of the bank and fills the "Gap" with seller financing. In this case the price is preserved to what the business CF can support. Hence, seller financing is a "Price Preservation" concept (provided the interest on seller financing is the same as that of the bank.
I cover this and many other such topics when I teach. For example, does higher growth mean more value? Does lower ROI mean higher price? Some of you have gone through the class and know the tools for such analysis.
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