Seller Financing: How Seller Notes Work in a Business Acquisition

Seller financing means the seller accepts a promissory note for part of your purchase price instead of getting all of it in cash at closing. You owe the seller. The seller sits behind the bank in the capital stack, and the note is a negotiated contract between the two of you with terms the lender has to approve.

There are two different instruments hiding under the same name, and you need to know which one you are negotiating.

• A standby seller note. No principal or interest is paid for the entire term of the SBA 7(a) loan. The lender documents it on SBA Form 155. Because the seller is not drawing cash out of the business while the bank is exposed, the lender lets it count toward your equity injection, up to a limit.
• A paying seller note. You make scheduled payments to the seller while the SBA loan is outstanding. It does not count as equity. It counts as debt, so its payments go into your debt service and the lender tests coverage with them included.

At closing, the mechanics are simple. The SBA loan proceeds and your cash go to the seller. The seller signs the note as a creditor and you sign it as the borrower. The portion of the price covered by the note is not paid at closing. It is paid later, on the schedule in the note.

On a standby note, interest may accrue and be added to the standby balance, to be amortized after the 7(a) loan is paid in full. The seller is, in effect, agreeing to be paid last. That is why the lender treats it as equity, and why you cannot describe it to the seller as a loan you will pay down early. A note on full standby stays on standby for the life of the SBA loan.

If you are not using SBA financing, seller note terms are whatever you and the seller agree to, subject to your senior lender's consent. The rest of this page covers the SBA structure because it has the hardest rules and the most deals depend on it. For how the SBA loan itself is sized and priced, start at the SBA 7(a) acquisition financing index.

SOP 50 10 8.1, in force since October 1, 2026 for loans numbered on or after that date, sets a 10% minimum equity injection on a complete change of ownership and allows up to half of it to be a seller note on full standby. The lender may not waive that 10% for a complete change of ownership. The rules below are the ones that shape how a seller note gets built.

Two of these rules catch buyers off guard. First, the 1.25x is an SBA requirement for buying a business, not a lender preference, and a lender cannot approve around it with a rosy forecast. Second, the equity injection has to be verified. The lender needs bank statements showing your cash was available for at least 30 days, plus copies of checks or wires and settlement statements. A promissory note or gift letter alone is not sufficient, and fees you pay for education, advisory services or agent fees do not count toward the injection.

Use the SBA 7(a) loan calculator to test payment and coverage with your own price, rate and note structure before you write an offer.

On a $3,000,000 purchase with $650,000 of SDE, a 5% cash and 5% standby note structure cuts your cash at closing from $300,000 to $150,000 and leaves $2,700,000 for the SBA loan. Here is the sequence, assuming for illustration that total project costs equal the price. Real closing costs raise the project cost, and the 10% rises with it.

1. Size the injection. 10% of $3,000,000 is $300,000.
2. Split it. Limited sources can cover at most half, which is $150,000. The other $150,000 must come from unlimited sources: unborrowed cash, a personal loan repaid from a source other than the business, or a grant with no clawback. Your structure is $150,000 cash plus a $150,000 standby seller note.
3. Size the loan. $3,000,000 less $300,000 leaves a $2,700,000 SBA loan. That is above $350,000, so the variable rate ceiling is the base rate plus 3.0%, or 10.0% at the current 7.00% prime. The fixed rate ceiling on a loan above $250,000 is prime plus 5.0%, or 12%.
4. Run the lender's checks. The price is above $350,000, so the lender orders an independent valuation from a Qualified Source. The Business Purchase Price is $3,000,000, so unless owner-occupied real estate is carved out of it, the QoE requirement applies as well. Order the QoE early, because the lender must use its normalized earnings in the coverage test. You can read more on what a quality of earnings report covers.
5. Run coverage on the right number. The $650,000 is SDE: net profit plus one owner's full compensation plus documented add-backs. The lender divides EBITDA by debt service, and EBITDA is SDE minus a market-rate salary for the manager who replaces the owner. If you plan to hire that manager, your coverage number is lower than the SDE suggests. The $150,000 standby note is excluded from debt service, which is its benefit in this test.
6. Check the debt cap. The $2,700,000 SBA loan plus any seller debt that is not on full standby cannot exceed the valuation. If the appraisal lands below $3,000,000, the gap has to be closed with more equity or more full-standby debt, or by cutting the price.

The seller's side of this trade is plain. The seller receives the SBA loan proceeds and your $150,000 of cash at closing, and the $150,000 note sits unpaid while the SBA loan is outstanding, with accrued interest added to it. If the SBA loan runs to its 10-year maximum on the acquisition portion, the seller waits that long. Your offer has to make that wait worth accepting, and the negotiation points below are where it gets paid for.

On an SBA deal the lender fixes the structure of the standby note, and you and the seller negotiate everything around it: how large the note is, what it accrues, and what happens when the seller is not paid. Who holds the stronger position depends on how many buyers the seller has and whether the seller needs cash at closing.

• Size of the note. The standby note can be up to 5 points of the 10% injection. You can offer less. The seller, who is waiting for payment, will push for the smaller note. You will push for the full 5 points because it reduces your cash. A seller with competing offers holds the position here, since another buyer can offer all cash at the same price.
• Interest rate and accrual. Interest may accrue on a standby note and be added to the balance. The rate is negotiated. The seller is giving up current income for the whole SBA term, so this is where a buyer who wants the note pays for the favor.
• Payout after the SBA loan. The note amortizes after the 7(a) loan is paid in full. Set the amortization and final maturity in the LOI, not at the closing table, so neither side reopens the structure when the lender's counsel drafts the documents.
• Offset rights. Whether you can reduce the note for a breach of the seller's representations or a post-closing claim is a negotiated term. Sellers resist it. Buyers want it because the note is the only money still in the seller's hands after closing. The lender's consent matters, because the offset affects the standby document.
• Default and acceleration. A standby seller cannot demand payment or accelerate while the SBA loan is outstanding. Expect the seller to ask for protections that begin after the SBA loan is repaid.
• Price versus structure. A seller who sees a note as risk may ask for a higher price to accept one. Because the lender caps total acquisition debt at the independent valuation, a price pushed above what the appraiser supports gets stuck. Any amount above the valuation has to be equity or full-standby debt.

Put the note size, rate, accrual, post-loan amortization and offset position into the letter of intent. The letter of intent guide shows where each of those terms belongs in the document.

The mistakes below all come from the same source: treating a seller note as flexible financing when the SBA rules fix what counts and what does not.

• Counting a paying note as equity. Only seller debt on full standby counts toward the injection. A note with monthly payments is debt, and it adds to debt service and to the total acquisition debt tested against the valuation.
• Stacking the limited sources. Standby seller debt, other standby debt and a non-controlling investor under 20% share the same cap of half the injection. A $150,000 seller note and a $150,000 minority investor cannot both count on a $3,000,000 deal. Half of the $300,000 is the ceiling for all of them together.
• Running coverage on SDE. The lender uses EBITDA, and on a deal of $3,000,000 or more it uses the QoE's normalized earnings. A buyer who sizes the deal to SDE and then hires a manager finds the coverage ratio below 1.25x late in underwriting.
• Relying on projections. Under 8.1, projections can be reviewed but cannot be used to meet the 1.25x floor. Growth you plan to build does not count.
• Promising the seller an early payoff. A note on full standby stays on standby for the life of the 7(a) loan. The 36-month seasoning rule is for notes that are paid as agreed, and it applies to a different instrument. Do not describe the standby note as something you will refinance in a few years.
• Forgetting the balloon. The accrued interest is added to the balance and amortized after the SBA loan is repaid. Model the cash flow for the years after the SBA loan ends, because that is when the seller's payments begin.
• Paying for the injection with the wrong money. A personal loan counts only if it is repaid from a source other than business cash flow, and your salary from the business does not qualify. Advisory and agent fees you pay do not count at all.
• Ignoring the valuation gap. Agreeing on a price before the lender's appraiser has weighed in leaves the difference to be funded by equity or full-standby debt. Make the purchase agreement contingent on the valuation.

If you want the SBA structure tested against your own price and cash before you make an offer, the acquisition calculator shows how large a business your cash and cash flow can support.

Decide how much cash you actually have in unlimited sources, because that sets the size of the note you need. Then work through the steps in this order.

1. Count your unlimited sources. Unborrowed cash, a personal loan repaid from outside income, and grants with no clawback. The seasoned cash must show 30 days of bank statements.
2. Work backward from the 10% injection. Take 10% of total project costs, including closing costs, and set the limited sources to no more than half of it.
3. Compute coverage on EBITDA. Start from SDE, subtract the market salary for a replacement manager, and divide by the debt service on the SBA loan and any seller note that is not on standby. You need 1.25x on historical results.
4. Put the note in the LOI. State the size, full standby status, rate, accrual, post-loan amortization and offset position, and make closing contingent on the lender's valuation.
5. Line up the third-party reports. If the Business Purchase Price is $3,000,000 or more, the lender requires a QoE that cannot be prepared by or for the seller. A buyer-ordered report can be reviewed by the lender through a qualified vendor if it meets SBA minimums.
6. Get a lender early. The lender has to approve the standby document on Form 155 before you can rely on the note as equity.

Munera's Acquisition Launch sources off-market deals for buyers and introduces lenders, so you can test a seller note structure against a real business and a lender's underwriting at the same time. Start with the SBA acquisition financing index if you want the loan terms first.