Seller asking for collateral in a seller-financed deal

July 12, 2023

by a searcher from Brigham Young University in Vineyard, UT 84059, USA

Hi All,

I'm in negotiations for a business right now that is 80% seller financed. Since there isn't a bank involved or other hard assets, the seller is asking for collateral to hold against the seller financing. I'm a little unfamiliar how this typically works in business acquisition given that collateral isn't exactly the same as a personal guarantee.

Can anyone explain how collateral is different than a personal guarantee?

Is it possible to use a retirement Roth IRA as collateral? Or is it basically constrained to real estate, high-value items (i.e. cars), and cash?

2 Likes

13 Replies

232 Views

Replies

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I have seen sellers request collateral before. If you are giving them a lien on the business assets, that should be sufficient collateral if they believe the business value is there. It is not uncommon for them to want a personal guarantee, but I would not tie any of your personal assets directly into that guarantee. Outside of SBA loans that can require that, most traditional lenders do not require the pledge of personal assets as additional collateral on a business loan. If they believe the business value is there that they are willing to fund the deal, they should be confident in your ability to generate cash flow to repay their loan from that business. Just my two cents. Side note, you cannot pledge retirement assets as collateral on a third party loan. You can borrow money directly from your retirement assets, but you could not use those to secure a business loan. Good luck.

Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA

It is pretty standard for a seller to want collateral to secure the seller financing. If the assets consist of ARs, Inventory, and equipment, the lender's attorney can prepare a UCC financing statement to be recorded as a lien on the assets. If the assets are real estate, then a deed a trust can be prepared to record against the property. If the assets are titled vehicles, then a lien on the titles is recorded. As others have pointed out, a personal guarantee is NOT collateral. A personal guarantee is a promise to pay if the primary borrower defaults. A personal guarantee may or may not be collateralized. However, if the guarantor defaults, the lender can sue the guarantor for payment. Bank lenders take collateral and get a personal guarantee from the borrower. If I was the seller's advisor, I would recommend the same thing.

+11 more replies.

Join the discussion