Options for selling your business loan

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(FORTUNE Small Business) -- Dear FSB: I sold my small, family-owned business recently but retained a business loan on the equipment we owned. I have a lien on the equipment and personal guarantees from the new owners that they will continue paying the loan, but I'm considering selling the note. Where can I find out information about doing this? What are the pros and cons of selling a business loan? Thank you.

- Dean Williams, Jacksonville, Florida

Dear Dean: The situation you find yourself in is fairly common, according to Leonard Alterman, an attorney who counsels small business owners in Jacksonville.

It works like this: Banks that lend business owners like yourself the money to buy equipment won't simply roll that loan over to the new owners. Nor will they take the past performance of your family business into account when evaluating the credit worthiness of the new owners. If the individuals you sold your business to don't have outstanding credit or a strong track record of business success, they may be unable to obtain a loan of their own to buy your equipment, making you the lender of last resort. The formula is pretty simple: you keep paying the bank for your equipment, and the new owners - who are using the equipment - pay you, Alterman said.

That's all well and good, unless the new owners decide they want to stop paying you, or fail to run your family's former business as profitably as you did and find themselves short of cash. If you're uncomfortable taking on that risk, then selling your loan may be a good idea. Fortunately for you, there is a market for so-called "business paper," and any number of companies or individuals who would be willing to buy your loan from you.

Such buyers, however, will be buying your loan at a discount, breaking off a piece of what's owed to you as profit for themselves. For example, if the amount of your loan is $50,000 at an 8% interest rate, the company that buys your note might only give you $40,000 or $35,000 for it. Moreover, the income you earned will be taxable, and may count as capital gains, Alterman said.

Another option is selling your equipment to a company that does leaseback arrangements, said Allan Bettis, principal of The Legacy Associates LLC, a consultancy serving family-owned businesses in Wayzata, Minn. In a leaseback arrangement, the third-party company buys the equipment in question, then leases it back to the user, taking advantage of the depreciation and assuming responsibility for the upkeep of the equipment.

You should certainly consult an attorney and, perhaps, an accountant before simply selling your loan to a third party. But if you're worried about the future success of the new owners, the overall economy - or if you just feel like you could get a better return by putting your money elsewhere - then selling your note is the right move.

Should you decide to sell your loan, start out with established banks and lenders there in your community, rather than going to the Internet to find a buyer, Alterman said. There are any number of resources available to you there in Jacksonville. The University of Florida's Small Business Development Center has experts on staff to advise you and ties to a wide range of community resources, said Cathy Hagan, area director of the SBDC. There is also a local chapter of SCORE, which provides business counseling to entrepreneurs and small business owners like yourself.