Closing in three weeks on the sale of my commercial cleaning company. Buyer is putting 25% down and I'm carrying a 7-year note at 6.5%. My attorney drafted a pretty bare-bones promissory note and I'm wondering what I should push for on late fees and cure periods. I don't want to be a hardass but I also don't want to get walked on. What's reasonable?
Seller Financing
Writing cure periods and late fee penalties into your note contract
First question: is the note secured by the business assets or is it unsecured? Because that changes everything about how much teeth you need in the late fee language.
5% late fee after 10 days is pretty standard in my experience. Cure period of 30 days for monetary defaults, but honestly if they miss a payment you want the clock running fast. Non-monetary defaults are where you can afford to be generous.
Secured against equipment and receivables. Personal guarantee too. Does that make the late fee less important?
Late fees don't matter if you're not willing to actually enforce them. Half the sellers I know write nasty language into the note and then let the buyer slide three months before they even make a phone call. That said, if you've got a PG and a security interest, you're in decent shape. I'd do 5% or the prime rate plus a few points, whichever is higher, kicking in after a 10-day grace.
GravyBoatMike nailed it. The clause is theater unless you're prepared to send the default notice. Ask yourself: are you actually going to foreclose on the equipment if they're 45 days late? Probably not. You'll call, and complain.
Careful with usury limits depending on your state. A 5% late fee on top of 6.5% interest can get you into trouble in some jurisdictions if it's characterized as interest rather than a fee. Have your attorney check.
This is the boring answer but: whatever you write, make sure the cure period for a monetary default is shorter than the cure period for a non-monetary default. I've seen notes where a missed payment gave the buyer 30 days to 'cure' and they just... didn't. Meanwhile the seller couldn't accelerate.
fernwoodlane is right to flag usury. I'd also add: define 'late' precisely. Is it the ray after the due date, or the 10th? Ambiguity is where lawyers make their money.
Appreciate the usury heads up. My attorney is in-state so hopefully he's on top of it. @snarky_penguin — fair point, I'm probably not going to foreclose over a late payment. But I want the option to at least start the clock.
OP, one thing nobody's mentioned — the acceleration clause is more important than the late fee. If theyre chronically late, you want the right to call the whole note due. Late fees are just a nudge; acceleration is the hammer.
Also think about what happens if they sell the business again. Does your note accelerate on a subsequent sale? You'd be amazed how many sellers forget that.
The number of people in this thread who are basically saying 'hire a lawyer' while clearly not having hired one for their own deals is hilarious.
Guilty. My note was two pages and I wrote it myself. It worked out but I'm not proud of it.
One more thought and then I'll shut up: put the late fee in the note AND in the security security agreement. If they're inconsistent you've created a problem for yourself.
Honestly the fact that you're thinking about this three weeks out is better than 90% of sellers. Most people just sign whatever the broke hands them and hope for the best.
Cure period for monetary defaults — is 10 days too aggressive? I don't want to seem like I'm expecting them to fail.