What is a Seller Second Lien?
Small Business Administration (SBA) loans offer several key benefits over conventional loans, making them a desirable option for business owners. These include favorable rates and fees, lower down payments, longer repayment terms, and easier qualifying requirements. But while credit score, collateral, and other borrowing requirements are slightly lower with SBA loans, some business owners may find themselves marginally qualified for SBA loan products such as 7(a) loans and CDC/504 loans.
If this describes your situation, seller second-lien financing may be worth your consideration. This Ameris Bank blog article provides an overview of seller second-lien financing, including what it is and how it works.
Seller second-lien financing at a glance.
Seller second-lien financing is a good option for business owners who need a solution to get their SBA loan requests to the finish line (approved and closed) if they are only marginally qualified. Like SBA loan products, second-lien financing affords business owners the benefits of flexible underwriting and favorable rates and terms.
Examples of seller second-lien financing.
One of the most common examples of seller second-lien financing is where a business is being acquired, or business real estate is being acquired from a seller who wants to help the buyer qualify for primary financing. Small business borrowers usually want to preserve cash for everyday business operations and working capital, and they are reluctant to part with down payments sufficient to satisfy their business lender.
If the seller agrees to subordinate their second lien to the SBA lender and agrees not to take payments until the SBA loan is satisfied, SBA allows that second lien financing to be treated as part of the buyer's qualifying equity. In general, seller second-lien financing supplements the buyer's qualifying equity in cases where the buyer provides at least a 10% down payment.
This is a beneficial solution for all parties. The seller gets most of their money, the buyer's down payment is lessened, and the SBA loan financing percentage is reduced. It is worth noting that many business lenders do not allow second liens behind their primary loan, but SBA lenders like Ameris Bank do allow it.
Reasons to carry second-lien financing.
You may be asking yourself, "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 many instances, the seller is anxious to sell the business or real estate as soon as possible. And since the seller is receiving a large amount of cash from the buyer's down payment, plus the buyer's loan proceeds, they are willing to carry a small amount of second-lien financing.
Furthermore, this action allows the seller to delay some of their income tax liability and provide an interest-earning asset. If the seller believes the buyer will continue to be successful with their business, they know they will be repaid on the seller financing when the primary loan is satisfied. For a business acquisition scenario, the buyer and the lender like to see the seller second-lien financing because the seller still has some "skin in the game" to make sure the ownership transition is smooth and successful.
Finally, the seller often enjoys offering the seller second-lien financing, so they don't have to negotiate further with price reductions.
Interested in learning more?
Now that you better understand how seller second-lien financing works and its unique benefits, you might want to find out if it may be an option for your business. To qualify for seller second-lien financing, there are certain qualifications and requirements that must be met. Ameris Bank's SBA business development officers are fully versed and knowledgeable of all aspects of SBA lending and seller second-lien financing. Contact us today for more information. We welcome the opportunity to assist you with your financing needs.
Revised March 2023
All loans Subject to credit approval
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.