What does full standby mean on a seller note?
Short answer
No payments of principal or interest for the term of the 7(a) loan. Interest may accrue and be added to the standby debt, then paid after the 7(a) loan is paid in full. Source: SOP 50 10 8.1, App. 15, Para. C.2.a.
It means the seller receives no payments of principal or interest for the term of the 7(a) loan. SOP 50 10 8.1, App. 15, Para. C.2.a, uses that definition for standby debt and seller debt counted as equity.
What can happen during standby
Interest may accrue. It may be added to the standby debt and amortized after the 7(a) loan is paid in full.
What the seller agrees to
SBA Form 155, or the lender's equivalent, formalizes this. A copy of the note must be attached. Under Form 155, the standby creditor agrees to:
- Take no action to enforce claims on the standby loan until the SBA loan is satisfied (para. 3)
- Take no action against collateral without the lender's written consent (para. 4)
- Subordinate any security interest to the lender (para. 5)
- Turn over payments received in violation of the agreement within 15 days (para. 2)
Form 155 has four payment options
Box one accepts no further payments until the lender's loan is satisfied. The other boxes allow interest-only or scheduled payments. Because SBA counts only debt with no principal or interest payments as equity, box one is the fit for equity treatment.
Limits on the standby provider
The provider of standby debt may not take an equity investment in the business (App. 15, Para. C.2.a).
Refinancing later
Seller debt can be refinanced after it has been in place and current for 36 months. App. 15, Para. A.3.a, says that period must be not on standby. A note still on full standby does not meet that test.
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