The seller of goods may finance the buyer’s purchase of any item. An installment agreement requires the buyer to pay the seller the purchase price in installments over time. Both the buyer and the seller may benefit from such an agreement. Payment amounts and timing can be structured in an infinite variety of ways and tailored to best meet the needs of both parties.
Seller Financing of a Purchase
Two Alternatives
If a buyer needs time to raise money to purchase items, and the seller (1) doesn’t want to wait to close the sale and (2) is willing to defer payment in full for the needed time, there are two ways forward:
Installment Payment Financing. At closing, the seller and buyer sign and record and agreement that sets out the terms for payment of the unpaid purchase price. The seller retains title to the goods until the purchase price is paid. (This is the approach explored in this guide.)
Seller Take Back Financing. At closing, the seller delivers the goods to the buyer. At the same time, the buyer delivers a promissory note to the seller for the unpaid purchase price and records a signed agreement on the items to secure that debt. (This approach is the focus of the guide Seller Take Back Financing.)
Either financing alternative provides the buyer the right to use the goods while paying off the purchase price. Either alternative may be a good strategy if one or more of the following circumstances apply:
Comparing the Alternatives
Of the two alternatives, seller take back financing provides a more secure position for the buyer. By taking title at the beginning of the payment period, the buyer may be afforded clearer and more robust legal rights in the event of an alleged default.
However, an installment agreement may address a couple of practical problems (that may arise with seller take back financing):
A Well-Used, Useful Tool
Installment agreements (sometimes called contracts) have been used for many years.
Private arrangements between the seller and buyer avoid the fees and interest rates charged by banks and other mortgage lenders.
Payments can be timed to coincide with the buyer’s projections for when funding will become available from grants and donations.
The Basics
Buyer Becomes Equitable Owner; Seller Remains in Title
When an installment agreement is signed by the buyer and seller, the buyer becomes the equitable owner of the goods. This means that the buyer can exercise agreed-upon rights of ownership, use, and enjoyment of the goods during the term of the installment agreement. However, the seller retains legal title to the goods. This provides the seller security: if the buyer fails to make payments in accordance with the terms of the installment agreement, the seller may be able to recover possession of the goods quicker and at less expense than if foreclosing on a contract.
Key Implementation Components
The first key to successful implementation of an installment agreement is that the buyer and seller must have a meeting of minds as to the length of time available for the buyer to pay the purchase price in full; the amount and timing of installment payments; and the rights and responsibilities of the respective parties during the installment period.
Second, the parties will need the professional advice of their respective counsels to structure and document an installment transaction that protects the investment.
Examples of Payment Terms
The seller and buyer are free to set the amount and frequency of installments any way they choose in the installment agreement.
