How do seller notes work alongside an SBA loan?

Two kinds of seller note in an SBA deal

In a business sale, a seller note is the part of the price the seller agrees to receive later, as a loan to the buyer. In an SBA acquisition it can play two different roles, and the lender treats them as two different instruments. The difference is not the amount or the interest rate. It is whether the note is allowed to take cash out of the business while the SBA loan is outstanding.

Both kinds can appear in the same deal. A seller might carry one note on standby to help with the injection and a second, paying note for more of the price. What the lender will not accept is a single note that is counted as equity and also paid: equity is money that waits behind the lender, and a note that draws cash from the business while the SBA loan is outstanding is not waiting.

What full standby means in practice

Full standby is a written commitment by the seller not to take anything from the business, or to enforce the note, while the SBA loan is outstanding. The seller signs SBA's standby creditor's agreement, which subordinates the note to the SBA loan and bars payments of principal and interest. The note's maturity is set so that it cannot fall due while the SBA loan is still in place, and any lien the seller takes ranks behind the lender's.

SOP 50 10 8, in effect since June 2025, requires that standby to last for the life of the SBA loan. An earlier version of the rules allowed a shorter standby period, and some older guidance and templates still reflect it. They are out of date: a note that resumes payments before the SBA loan is repaid cannot be counted toward the equity injection under the current rules. A glossary entry on full standby sets out the definition on its own.

Interest may accrue during the standby and be paid after the SBA loan is repaid; the rate is written into the note, and the lender reviews the note and the standby agreement together before closing. What cannot happen is a payment. A seller who is told the business is doing well and asks to be paid something early is asking the buyer to break the loan agreement.

Standby means the seller waits until the SBA loan is gone — up to 10 years on a business acquisition, longer if real estate is in the loan — unless the buyer refinances or sells first.

How the numbers work

For a complete change of ownership, SBA requires an equity injection of at least 10% of total project costs, which include the price, working capital, closing costs and financed fees. Take a deal with total project costs of 2,000. The minimum injection is 200. A seller note on full standby can supply up to half of that, 100; the buyer must bring the other 100 at least, from verified funds. The table below compares four ways of paying for the same deal.

The third row is where most deals get into trouble. A paying seller note shrinks the SBA loan, which looks helpful, but its payments are added to the SBA loan's in the debt service coverage test, and SBA requires at least 1.15x; from 1 October 2026 a change of ownership must show 1.25x on historical results. Suppose the business's adjusted cash flow is 1,250 and the SBA loan's annual payments are 1,000: coverage is exactly 1.25x. Add seller-note payments of 150 a year and coverage falls below even the 1.15x minimum. The lender then has three answers: a smaller SBA loan, which means more cash from the buyer; a seller note on standby; or a decline. Seller notes usually carry shorter terms than the SBA loan, so a modest note can produce a surprisingly large annual payment.

When each kind of note makes sense

A standby note earns its place when the buyer is short of the full injection in cash but the business comfortably services the SBA loan on its own. It lets the buyer close with less cash without adding a single dollar to annual debt service. It is also the cleanest way to show the lender that the seller believes the business will keep performing after the sale, which lenders read as a signal, especially when the business depends on the seller's relationships.

A paying note fits when the buyer can already meet the injection in cash, the cash flow covers both loans with room to spare, and the seller wants to be paid over a period of years rather than wait for the SBA loan to be retired. It does not improve coverage: the same total debt is still being paid, usually over a shorter term. What it can do is fill the space between the price and the most a particular lender will lend against the business, when the cash flow carries both.

Neither kind can be used to disguise an earnout. SBA prohibits an earnout to the seller in a change of ownership it finances, and a note whose amount depends on future performance is treated as one. How deferred, contingent price interacts with senior debt outside SBA is covered in how earnouts interact with acquisition debt.

Negotiating the note with the seller

A seller asked to go on full standby is being asked to become an unpaid, subordinated creditor of the business they just sold, for as long as the SBA loan runs. Many sellers accept it when it is explained plainly and priced fairly. The terms that usually come up:

• Interest. Where the note lets interest accrue during standby, the rate is the seller's main compensation for waiting. It is a price term like any other.
• When it gets paid. Usually a single payment, or the start of amortization, once the SBA loan is repaid, including when the buyer refinances or sells the business earlier.
• Security. A junior lien on the business assets and a personal guarantee from the buyer give the seller something beyond a promise, subject to the lender's approval.
• Offset rights. Buyers often ask for the right to reduce the note for breaches of the seller's representations in the purchase agreement. That protects the buyer without a separate escrow.
• The split. A deal can use a standby note for the equity portion and a smaller paying note beside it, provided coverage holds with the paying note's payments included.

The lender must approve the note's terms before closing, so it is cheaper to agree them in principle in the letter of intent than to renegotiate them after a lender has read the file. The letter of intent is one of the first documents a lender asks for; the rest are on what lenders need to finance an acquisition.

After closing: refinancing and paying the seller out

The standby ends when the SBA loan does. Buyers who have grown the business often refinance the SBA loan into conventional debt after some years, and the refinancing can pay out the seller note at the same time, which is often the seller's best route to being paid early. On an SBA loan of 15 years or more, prepaying more than 25% in any of the first three years costs 5% of the amount prepaid in year one, 3% in year two and 1% in year three. The mechanics, and what a new lender needs to see, are in refinancing a seller note and refinancing an existing SBA loan.

Outside SBA, conventional senior lenders treat seller paper differently: they usually allow scheduled payments but subordinate them, block them when the borrower misses a covenant, and test coverage before each payment. That trade is part of choosing between programs, set out in SBA 7(a) vs a conventional acquisition loan. The broader mechanics of the SBA loan itself are on how SBA 7(a) loans finance a business acquisition.

Transparent models every seller-note structure in the financing model before a lender sees it, so the coverage with and without the note's payments is on the page rather than discovered in underwriting. What that model contains is on the package.