Seller notes - simple or compound interest?

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December 13, 2019

by a searcher in Jackson, MS, USA

What’s the standard on interest earned on a seller note? Are payments monthly, quarterly, annual?

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commentor profile
Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
Agree with ^redacted‌, there is not a standard; but what we have seen most often is monthly payments, particularly if there is a corresponding SBA loan involved. Other considerations include the amount/percentage of the total consideration that is seller finance, the strength of the overall offer, the strength of the buyer, whether or not there is a standby period, the total term of the loan, amortization period, and interest rate. The more the additional items are less favorable to the seller, the more likely monthly will be a way to offset some of those. Throwing annual on top of other less favorable terms weakens the offer.
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Reply by a searcher
from University of Pennsylvania in Indianapolis, IN, USA
Unless you have deferred payments where the interest accrues, it will not compound. If you are worried about quarterly or annual payments, then always simple unless the capital source wants compound interest, but even then the difference will be minimal.

Otherwise, whatever terms you can negotiate with the seller are fine and it is obviously in your best interest to get the best rate/payment you can to reserve cash flow.

I would personally offer more rate to get deferred or interest only payments or full amortization with no interest.
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