Full standby: what it means when a seller note goes on standby

What full standby means

Standby is a promise by a creditor, here the seller who has taken back a note for part of the price, to wait. Full standby is the strictest form: the note receives no payments of any kind. Not principal, not interest, not a reduced amount. Partial standby arrangements, such as interest-only or payments deferred for a year or two, are not full standby, and SBA does not treat them as equity.

The seller documents the promise in a standby agreement with the SBA lender. SBA's own form is the Standby Creditor's Agreement (SBA Form 155). In it, the seller agrees that the note is subordinate to the SBA loan, that no payments will be made or accepted while the standby lasts, and that the seller will not take action to collect. The note itself should say the same thing; a note whose terms conflict with the standby agreement is a problem the lender will catch at closing.

Interest may accrue during standby and be paid once the SBA loan is repaid. Nothing, principal or interest, may be paid while the standby lasts.

The SBA rule under SOP 50 10 8

For a start-up or a complete change of ownership, SBA requires an equity injection of at least 10% of total project costs. Seller financing can count for up to half of that required injection, but only if it is on full standby for the life of the SBA loan. Earlier versions of SBA's rules allowed a shorter standby period; the current rule is the life of the loan. See seller notes and SBA's full-standby rule for the full treatment.

In plain numbers, for a purchase with total project costs of 1,000:

A seller note can be larger than the half that counts. The extra is simply subordinated debt: on standby if the parties agree, or paid if the lender allows. Only the standby portion up to half of the required injection counts as equity. A seller note that is not on standby is allowed, but it is debt: it counts in debt service, not toward the equity injection.

Standby is for the life of the SBA loan. On a ten-year acquisition loan, that can mean ten years before the seller receives anything, unless the SBA loan is repaid or refinanced sooner.

Standby, coverage and the lender's view

A standby note matters to the lender's arithmetic in two ways. It stands in for buyer cash in the equity test, and it stays out of the debt service coverage calculation because it takes no payments. A paid seller note, by contrast, adds its payments to the business's debt service. On a tight deal, moving a seller note from paid to standby can be the difference between coverage above the lender's minimum and coverage below it. SBA requires at least 1.15x, and from 1 October 2026 a change of ownership must show 1.25x on historical results; banks commonly look for 1.25x.

Lenders also read a standby note as a signal. A seller willing to wait behind the bank for years believes the business will keep performing under new ownership. A seller who insists on payments from the first month may simply want liquidity, but the lender will ask whether the seller knows something about the business's durability that the buyer does not.

What the seller gives up

Full standby asks a lot of a seller, and buyers should negotiate knowing it. The seller gives up:

• Time. No payments until the SBA loan is repaid, which on an acquisition loan can be up to 10 years.
• Priority. The note is subordinate. If the business fails, the SBA lender is repaid from the collateral first, and the seller may receive nothing.
• Remedies. Under the standby agreement, the seller cannot sue or enforce the note while the SBA loan is outstanding.
• Liquidity. A standby note is hard to sell or borrow against.

In return, the seller gets a closed sale at the agreed price, which may not have happened otherwise, and often better terms on the note itself: a higher interest rate that accrues during standby and is paid after the SBA loan, or a balloon due when the SBA loan is repaid. Some buyers plan from the start to refinance the SBA loan once the business has paid down debt, which ends the SBA standby. Whether the seller is then paid depends on the new lender, which will usually want the note subordinated too; see also refinancing a seller note. Sellers should also take tax advice, since the timing of payments on an installment sale affects their taxes.

Standby outside SBA

Conventional lenders use the same vocabulary more loosely. A senior lender will almost always require a seller note to be subordinated, and the subordination agreement may block payments entirely, allow scheduled payments only while the borrower meets its covenants, or stop payments after a default. Full standby in a conventional deal is a negotiated term, not a program rule, and conventional lenders often let a seller be paid currently if coverage and leverage leave room. That flexibility is one of the real differences between the two routes; see SBA 7(a) vs a conventional acquisition loan.

Whatever the route, the terms of a seller note belong in the letter of intent, not in the last week before closing. A seller who agreed to be paid monthly and learns at closing that the note must sit on standby for a decade is a deal at risk. Transparent's lender package sets out the seller note's terms, standby status and effect on coverage alongside the loan request, so every lender reviewing the file sees the same structure. See what goes in the package.