# Seller financing: how a seller note works **Short answer:** A seller note is a loan from the seller for part of the price. SBA counts one as equity only on full standby, with no payments during the loan term. It can cover only half of the required equity. Source: SOP 50 10 8.1, Appendix 15. Canonical page: https://www.sbaexpress.loans/guides/seller-financing/ Last checked: 2026-11-09 ## On this page - [A seller note is a loan from the person selling to you](#a-seller-note-is-a-loan-from-the-person-selling-to-you) - [SBA treats a seller note in one of two ways](#sba-treats-a-seller-note-in-one-of-two-ways) - [A worked example shows the trade](#a-worked-example-shows-the-trade) - [A standby note still earns the seller something](#a-standby-note-still-earns-the-seller-something) - [A paying note can be refinanced after 36 months](#a-paying-note-can-be-refinanced-after-36-months) - [Terms to settle before you sign](#terms-to-settle-before-you-sign) - [The IRS treats a low-interest note as if it had interest](#the-irs-treats-a-low-interest-note-as-if-it-had-interest) - [When a seller note is a bad idea](#when-a-seller-note-is-a-bad-idea) ## A seller note is a loan from the person selling to you A seller note is a loan from the seller to the buyer for part of the price. The buyer pays part at closing and the rest over time under a promissory note. The note sets the amount, interest, payment schedule, security and what happens on default. For the buyer, a note lowers the cash needed at closing and the bank loan needed. For the seller, it can close a sale that a bank loan alone would not fund. Both sides take a risk, and the sections below price it in dollars. ## SBA treats a seller note in one of two ways SBA treats a seller note as equity or as debt, and the difference is whether it pays during the SBA loan term. - **On full standby.** The note stays on full standby for the term of the 7(a) loan, with no payments of principal or interest. It can then count as part of your equity. Seller debt, standby debt and minority equity together can supply no more than half of the required equity injection. Interest may accrue and be paid after the SBA loan is repaid. The seller must subordinate its liens and take no action against the business without the lender's consent. - **Not on standby.** The note is ordinary debt. Its payments go into your coverage calculation. The total debt, including the note, cannot exceed the business valuation (SOP 50 10 8.1, Appendix 15, Para. A). Two more SBA rules affect the note. Seller earnouts are prohibited. The seller may consult for no more than 24 months and may not stay as an employee or owner (Appendix 15, Para. A). ## A worked example shows the trade The trade is your cushion against the seller's wait. Suppose you buy a business for $800,000. With $50,000 of costs, the total project is $850,000. Equity of 10% is $85,000. The business earns $190,000 a year in EBITDA. Assume the independent valuation supports the $800,000 price. For the arithmetic, use a 10-year SBA loan at 10% in both structures and 6% on any paying note. These are not quotes. **Structure A, standby note** - Seller note on full standby: $42,500, the most that counts toward equity. - Your cash: $42,500. - SBA loan: $765,000. Payments: $121,314 a year. - Coverage: $190,000 divided by $121,314 is 1.57. - The seller is paid nothing while the SBA loan runs. **Structure B, paying note** - Your cash: $85,000. - Seller note: $160,000, paid over 5 years at $3,093 a month, or $37,119 a year. The seller collects $185,595 in total. - SBA loan: $605,000. Payments: $95,941 a year. - Total payments: $133,060. Coverage is 1.43. - Check: total debt of $605,000 plus $160,000 is $765,000. That is below the $800,000 valuation, which SBA uses as the limit on debt. Both clear 1.25:1. Structure A leaves you more cushion and the seller waiting. Structure B pays the seller and thins your cushion. ## A standby note still earns the seller something A standby note can accrue interest. SBA allows the interest to be added to the standby debt. The total can be amortized after the SBA loan is paid in full (SOP 50 10 8.1, Appendix 15, Para. C.2.a). Suppose the $42,500 standby note accrues 6% simple interest for ten years. It grows by $25,500, to $68,000. The seller collects that after the SBA loan is repaid. Agree on how interest accrues before closing, and write it into the note. ## A paying note can be refinanced after 36 months A paying note does not have to run its full term. A seller note can be refinanced with a new 7(a) loan after it has been in place and current for 36 months. The refinance must still meet SBA's 10% payment test. It must also not reduce the lender's exposure (SOP 50 10 8.1, Appendix 15, Para. A.3.a). That can give you a way out of a short, high-payment note if the business performs. It does not apply to a standby note, which by definition has not been paying. ## Terms to settle before you sign A seller note is a contract, so settle its terms in writing: - **Amount and interest.** Both must make sense for tax. See the next section. - **Payments.** A standby note pays nothing for the SBA loan term. Any other note needs a schedule you can afford. - **Security and lien position.** An SBA lender needs the seller to subordinate its liens. - **Default and acceleration.** Know what makes the note due early. - **Standby agreement.** The lender uses SBA Form 155 or its own equivalent, with a copy of the note attached. - **Performance terms.** SBA prohibits seller earnouts but allows rebates to you based on business performance. ## The IRS treats a low-interest note as if it had interest A note that charges too little interest is taxed as if it charged more. If the contract does not charge enough, the IRS treats part of the price as interest. That follows sections 483 and 1274 of the tax code (IRS Publication 537). A note that says 0% generally will not stay 0% for tax. A seller can also report gain as payments arrive. That is the installment method, and it is a reason some sellers prefer a note. Ask your accountant how the sale will be taxed before you agree to terms. ## When a seller note is a bad idea **For the buyer** - **The seller will not accept full standby.** A paying note counts as debt and can sink your coverage. - **Your cushion is thin.** In the example, the note's payments are about 28% of all yearly debt payments. - **The note can be called early.** Read the default and acceleration terms. A note that becomes due on a late payment can put your bank loan in trouble. **For the seller** - **You need the full price at closing.** A note means waiting, and a standby note can mean waiting as long as the SBA loan runs. - **The note ranks behind the bank.** A standby creditor must subordinate its liens to the lender, so the seller is paid last if the business fails. - **You plan to keep working in the business.** After an initial acquisition SBA allows only a consulting role for a limited period. ## Sources - [SOP 50 10 8.1, Appendix 15: 7(a) Changes of Ownership, Para. A (pp. 362-364), Para. A.3 (p. 369) and Para. C.2.a (pp. 374-376)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx) - [SOP 50 10 8.1, Appendix 14, Para. A.1 (p. 355): refinancing seller debt](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx) - [IRS, Publication 537, Installment Sales (2025)](https://www.irs.gov/publications/p537)