November 3, 2016
A sale of a family-owned farm or other business may involve seller financing, where the owner sells assets to a buyer on an installment sale using a promissory note or a land contract. You may be willing to provide the buyer with financing to allow a family member, key employee, neighbor or other individual the opportunity to gain ownership on more beneficial terms than a bank would offer, or the individual may be entirely unable to obtain financing from a bank.
Regardless of who the purchaser is, you should be cognizant of the purchaser’s ability to satisfy the obligations he, she or it is entering into.
Advantages to buyer, seller
SELLER FINANCING: Without a bank involved in the sale of a farm, the seller should take steps to ensure that the buyer is creditworthy and will honor the transaction obligations.
There are various reasons why a farm sale might involve seller financing; some may benefit the seller, and some may benefit the buyer. A couple of benefits for the seller are that the seller will receive a higher amount of total payments with the interest payments, and the seller may have the ability to spread income taxes over the payment period. A seller-financed transaction may be beneficial for the buyer because there may be lower, or no, loan transaction and closing costs; the seller may charge a lower interest rate; and the seller may require a lower down payment.
However, without a bank involved, the seller should take steps to ensure the buyer is creditworthy and will honor the transaction obligations. The analysis that banks use to determine the creditworthiness of a borrower is commonly referred to as the five C’s of credit: character, capital, capacity, conditions and collateral.
• Character generally refers to the buyer’s honesty and integrity, and quantitatively is demonstrated with a strong credit rating.