Seller Notes and SBA Loans: How They Work, Why They Matter, and How to Protect Your Exit
- Mark Hartmann
- 3 hours ago
- 7 min read
You want the best deal possible when selling your business: the right buyer, price, and terms.
If your buyer uses SBA 7(a) financing, that’s often a good sign. It means they’re committed, vetted, and backed by a lender. But SBA financing has its own complexity, particularly around seller financing, also known as a seller note.
Seller notes are widespread in SBA transactions. They’re often the glue that holds the deal together. But they can also create confusion, risk, or even tension between buyer and seller—especially if not properly structured.
So let’s get into the details. This article explains everything you need to know about seller notes in SBA-backed deals, including:
• What a seller note is and how it works
• Why seller notes are used in SBA 7(a) loans
• How seller notes are structured
• The benefits and risks for sellers
• How to protect yourself while still getting the deal done
What Is a Seller Note?
A seller note is a form of financing the seller provides to the buyer as part of the business sale. Instead of the full purchase price being paid at closing, a portion is deferred and paid back over time—typically with interest.
In this structure, you become a lender, and the buyer becomes your borrower.
Simple Example:
Let’s say your business sells for $2.5 million.
• The buyer gets an SBA loan for $2 million
• They put down $250,000 in cash
• You carry a $250,000 seller note
The buyer pays you back that $250,000 over, say, five years—plus interest. It’s a valuable tool for deal-making and can be a win-win for everyone.
Why Seller Notes Are Common in SBA Deals
The SBA doesn’t require seller financing, but in practice, seller notes are used in many SBA-financed acquisitions. Here’s why:
1. To Meet SBA’s Equity Requirements
SBA guidelines require the buyer to inject at least 10% equity into the deal. If the buyer doesn’t have enough liquid cash, the SBA allows part of this to be satisfied with a seller note—but only if it’s on full standby for 24 months.
2. To Reduce Lender Risk
Lenders like seller notes because they show the seller is confident in the business and the buyer. When a seller leaves money in the deal, it gives the lender added peace of mind that the numbers are accurate.
3. To Bridge Valuation Gaps
Sometimes, buyers and sellers agree on value—but the SBA won’t finance that full purchase price. A seller note can help “bridge the gap” between what the lender is willing to fund and what the seller is willing to accept.
4. To Keep the Buyer Motivated
If the seller is still owed money after closing, the buyer has an extra incentive to succeed. This keeps both sides aligned and focused on business continuity.
How Are Seller Notes Structured in SBA Deals?
Seller notes come in many flavors, but in SBA transactions, there are a few key structural elements to be aware of:
Term | Typically 5–7 years |
Interest Rate | 6% to 8% (fixed is common) |
Repayment | Monthly P&I, or interest-only with balloon |
Security | Often unsecured, sometimes subordinated to SBA loan |
Standby Status | Required if used toward buyer’s equity injection |
Let’s take a closer look at that last one.
The SBA “Standby” Rule: What It Means and Why It Matters
If the buyer uses a seller note as part of their 10% equity injection, the SBA requires that the note be placed on full standby for 24 months.
What “standby” means:
• No payments of principal or interest for 2 years
• You cannot enforce the note during that period
• Interest may accrue—but it cannot be paid
• Repayment begins in year 3
This protects lender cash flow and ensures that the business can service the SBA loan first. However, it also means you will not see a dollar from the note for at least 24 months.
If the note isn’t part of the equity:
Depending on lender preferences and the deal structure, you can structure it for immediate payments.
What’s in It for You? Seller Note Benefits
Let’s be honest—it might feel strange financing your own exit. But seller notes are not a concession—they’re a strategic tool with clear advantages.
✅ Unlock a Higher Sale Price
In many transactions, the seller note enables the buyer to meet the complete purchase price. Without it, the buyer may request a discount or be compelled to walk away.
✅ Widen Your Buyer Pool
Requiring an all-cash buyer or a substantial down payment limits your options. Seller financing brings more qualified, SBA-backed buyers to the table.
✅ Earn Interest Over Time
You’re not giving anything away. That $250K seller note might generate $75K in interest over five years.
✅ Defer Taxes
A seller note can help spread capital gains taxes over time (installment sale method). Ask your CPA.
✅ Strengthen the Deal
If you provide training or consulting post-sale, the seller note aligns everyone’s interests.
What Could Go Wrong? Seller Note Risks
While seller notes offer an upside, they carry some risk—especially if the buyer struggles post-close.
❌ Buyer Default
If the business falters, the buyer might not repay you—especially if the note is unsecured.
❌ SBA Priority
Your note is subordinated to the SBA loan. If the business is liquidated, the bank gets paid first.
❌ Standby = Delayed Cash Flow
In many cases, you won’t see a dollar for two years. That delay can impact retirement plans or future investments.
How to Protect Yourself When Offering a Seller Note
Here’s how to structure a seller note that supports the deal and protects your downside:
🔒 Get a Personal Guarantee
Even if the note is unsecured, the buyer should personally guarantee repayment. This gives you legal recourse if the business can’t repay.
🔒 Secure the Note (If Possible)
Ask for a subordinated lien on the business assets, equipment, or a UCC filing. This will not override the SBA lien, but it will provide leverage.
🔒 Negotiate Realistic Terms
Structure payments and interest rates that are fair to both sides. Avoid aggressive balloon payments or burdensome terms that might lead to default.
🔒 Define Default and Enforcement
Be clear about what happens if a payment is missed—interest rate increases, acceleration, attorney’s fees, etc.
🔒 Use the Right Professionals
Don’t DIY a seller note. Work with an experienced attorney and an M&A advisor who’s structured SBA-backed deals.
What About Earnouts?
Great question. Earnouts are not permitted in SBA 7(a) deals.
That means you can’t tie part of your sale price to future performance—at least not formally. Seller notes are often used as substitutes, giving you an upside while staying compliant.
Alternatives to Seller Financing
If you’re opposed to a seller note, here are a few options (with trade-offs):
💰 Larger Down Payment
Great for you—but it limits the buyer pool.
💼 All-Cash Buyer
It is possible in rare cases but uncommon in Main Street and the lower middle market.
🏦 Conventional Financing
Buyers with stellar credit and collateral may secure non-SBA loans. These loans come with fewer restrictions, but they usually have higher rates and shorter terms.
🔁 Equity Rollovers or Recaps
If you want to stay involved, you can sell a majority stake and retain some equity. But this only works with larger institutional buyers.
FAQs: What Sellers Ask About Seller Notes
Do I have to offer a seller note?
Not necessarily—but many SBA lenders (and buyers) will expect it. It’s a sign of goodwill and confidence in the business.
Can I charge interest?
Absolutely. 6% to 8% is typical. Some notes include interest-only payments for the first 12–24 months, followed by amortization.
What if the buyer defaults?
You may pursue repayment under the terms of your note. But remember, your note is subordinated to the SBA loan, and collection may be limited if the business fails.
Is a seller note better than an earnout?
In SBA deals, yes—because earnouts aren’t allowed. Seller notes are structured, enforceable, and interest-bearing.
Final Thoughts: Use Seller Financing Strategically
If the phrase “seller financing” makes you nervous, don’t worry—you’re not alone. Many sellers are initially skeptical about leaving money in the deal.
But here’s the truth:
In an SBA-backed sale, a well-structured seller note can help you get the best price, attract the best buyer, and close the deal on your terms.
It’s not a giveaway—it’s a tool. One that, when used strategically, adds strength to your exit, not risk.
Thinking About Selling Your Business?
Let’s discuss how seller notes and SBA financing fit into your exit strategy.
We’ll help you position your business for sale, evaluate the right buyers, and structure a deal that protects your legacy and financial future.
Mark Hartmann is a former business owner turned M&A advisor who knows firsthand what it takes to build, grow, and sell a successful company. A three-time Inc. 5000 CEO, Mark did just that before navigating its eight-figure sale—giving him a rare perspective that sets him apart from most brokers. Today, he helps owners of companies valued between $1M and $25M plan and execute smooth, profitable exits.
Mark understands that selling a business isn’t just a financial decision—it’s personal. That’s why he works closely with owners to protect their legacy, maximize value, and make the transition on their terms. He holds an MBA from Eastern University, a Master’s Degree in Organizational Change Management from St. Elizabeth University, and a Graduate Certificate in Executive Coaching from Columbia University. Some of his professional credentials include Certified Mergers & Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).
44 Washington Street, Unit #1080
Morristown, NJ 07960
Partner with HartmannRhodes, expert business brokers and M&A advisors, to strategically navigate your business sale—maximizing value and ensuring a smooth transition. Reach out for tailored business sale strategies. Contact us today!
Seller Notes and SBA Loans: How They Work, Why They Matter, and How to Protect Your Exit