What is Standby Creditor Agreement?
The Short Answer
Standby Creditor Agreement explained simply
A Standby Creditor Agreement is a formal legal document. It outlines a deal between two or more creditors. One creditor agrees to "stand by" and wait to be paid until another, primary creditor, has been fully paid. This is common in business sales. The seller might finance part of the sale. The bank providing the main loan will want the seller to sign a Standby Creditor Agreement. This means the bank gets paid back before the seller does, especially if the business struggles.
Real-World Example
The Bakery Sale Scenario
Imagine Sarah is selling her bakery to Tom. The sale price is $300,000. Tom gets a bank loan for $250,000. Sarah agrees to finance the remaining $50,000. The bank will likely require Sarah to sign a Standby Creditor Agreement. This agreement states that if Tom's bakery faces financial issues, the bank will be paid back its $250,000 before Sarah receives any of her $50,000.
Why this matters
This agreement is important for both buyers and sellers. For buyers, it can make it easier to get bank financing. Banks are more willing to lend if they know they are first in line to be repaid. For sellers who are financing part of the sale, it means they take on more risk. They need to understand that their repayment depends on the business doing well and the primary lender being satisfied first.
If you are a seller financing part of the deal, make sure you understand the terms of any Standby Creditor Agreement. It directly impacts when and if you get paid.
If you are a seller financing part of the deal, make sure you understand the terms of any Standby Creditor Agreement. It directly impacts when and if you get paid.
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