I own a small construction company and recently accepted an offer to sell. We have two equipment loans, one on an excavator and one on a dump truck. I'm trying to figure out the best way to handle paying them off during the sale. The buyer wants the equipment free and clear, but the loans have prepayment penalties. I'm weighing whether to pay them off before closing or negotiate with the bank. I also considered having the buyer assume the loans, but that seems complicated. Has anyone been through this? I'd appreciate any insights on what worked or what to avoid.
Equipment Loans
My experience paying off equipment loans during a business sale
I sold a landscaping business two years ago with similar equipment loans. The prepayment penalties were steep, so I negotiated with the bank to waive them by showing the sale agreement and promising to bring them future business from the new owner. It worked, but it took a few weeks. Get the bank invlved early.
Did the buyer insist on clean titles? If so, you might have to pay them off regardless. Check your loan docs for exact penalty amounts. Sometimes it's worth paying the penalty to close the deal.
I’m in the middle of this right now. Our bank offered a payoff discount if we refinanced the loans into a new short-term loan and paid that off at closing. It saved about 15% of the penalty. Might be worth asking.
Thanks for the ideas. I hadn’t thought about about refinancing as a workaround. I’ll call the bank tomorrow and see what options they have. The buyer is firm on clean equipment, so I need to resolve this.
Make sure you get a payoff letter from the lender well before closing. That letter should state the exact amount and that the loan will be satisfied. Buyers often want that as proof.
One thing I forgot to mention: if the sale price is enough to cover the loans plus penalties, just pay them off. The simplicity is worth something. I wasted two weeks trying to get the bank to budge and ended up paying anyway.
I work work at a credit union and we handle these all the time. The key is communication. If you tell us upfront that you’re selling, we can often work out a payoff schedule that avoids penalties or reduces them. But if you wait until closing, it’s harder. Also, the buyer assuming the loans is rare unless they have strong credit and the bank approves. Usually not worth the hassle.
What’s the size of the loans? If they’re small relative to sale price, just pay them. If they’re big, negotiate harder.
I’d also check if the buyer can get their own financing for the equipment and pay you a lump sum for the equipment portion. Then you pay off the loans. That’s what we did—it was cleaner.
Following
Small update: bank agreed to waive one penalty if we close by end of month. The other loan has a hard penalty we have to eat. But overall not too bad. Thanks for the advice.
Glad it worked out. At least you goot one waived.