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My wife and I are in the process of selling our business to a buyer. We have agreed on an amount to sell the business for, and to owner-finance the balance.

The buyer has already taken over day-to-day responsibilities as we have moved to out of state. The buyer is currently paying a rental fee until we have a contract formalized. The buyer has investors and believes he will be able to pay us off in full before the loan term ends, but that is not for certain.

What is an acceptable way to determine an interest rate and should it be structured in some way off of prime?

We have some credit card debt we were going to pay off with the money from the sale. I would like to structure the loan in a way to encourage the buyer to pay us off as soon as possible. Is there a common way to structure these agreements to facilitate such?

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Well to start with I would make sure that the interest total you are collecting each month is greater than the interest total you are paying each month on your credit card debt. So if you have $200 a month in interest you pay the credit card company I would make sure that the interest you collect on the loan is more than $200 a month. And make sure that you use some portion of the principle payment to pay down the credit card debt so that you are still even or ahead of the interest you owe the credit card company.

Beyond that I would want the rate to be higher than the borrower could expect from a bank. This will incentivize the borrower to either pay it off early or refinance the loan through a bank effectively paying it off early for you. Anything that shifts the risk off of you and onto someone else is in your favor here.

You could also implement some sort of final payment fee and reduce this fee by a certain amount (presumably up to 100%) if it is paid off early. I would graduate that amount so there is still incentive if the buyer misses the original date but still incentive to meet the date. If the loan was for 10 years then I would probably do around .5% per year early.

I would also get an attorney to draw up the loan paperwork to make sure that you(and potentially your heirs) are covered should you need to recover from a default, bankruptcy, or other potential problems. I would bet the lawyer fees will save you 5x+ the amount if only in headaches. And if you are dealing with family the lawyer makes a great fall guy to say I wish I could do that but the lawyer won't let me if the family member tries to take advantage.

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It seems a bit late in the process, no? They moved in, you are elsewhere, etc. Today, the Prime Rate is 3.25%. I don't know enough to suggest whether this is fair to both parties. It's more than you'd earn in the bank, and less than they'd pay for a business loan. My own equity line is currently 2.5%, for what that's worth.

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