Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.
A seller note is the part of the purchase price that the seller agrees to receive later instead of at closing. In effect, the seller lends you part of the price, and you repay it over an agreed schedule with interest. It is one of the most common pieces of a small business deal, and one of the most misunderstood.
Why sellers agree to one. Many owners care about more than the headline number. They want the business, the team and their name to be in good hands. A seller who carries a note keeps a stake in your success, and that tells a lender and the buyer something about how the seller sees the business. On the sell side, I watched good sellers choose buyers they trusted, and a sensible note is often part of that trust.
How it fits with an SBA loan. When a seller note sits alongside an SBA 7(a) loan, the bank is paid first and the note is subordinate. Depending on how the note is used in the deal, SBA rules and the lender may require it to be on full standby, with no payments, for a period of time. The rules on standby and on how a note can count toward your equity injection are specific and they change, so confirm the current requirements with your lender and attorney before you build the structure.
What to check before you sign.
- The payment schedule against cash flow. A schedule that looks fine at signing can squeeze working capital once the standby period ends and the note payments start alongside the bank loan. Model the cash period by period, including the year payments begin.
- Total debt coverage. Your coverage should hold up with the seller note payments included once they are active.
- The terms in writing. Interest rate, term, standby, what happens on a missed payment, and any right of offset if representations prove untrue.
- The relationship. You will be paying the seller for years. Structure it so both of you can live with it.
Try it on your own numbers. The free Simple Acquisition Model lets you enter the price, SBA terms and seller note and see debt coverage and buyer cash period by period, from the standby years onward. It is for analysis and education, not a buy or pass signal.
Frequently asked questions
What is a seller note?
The part of the purchase price the seller agrees to be paid over time, usually with interest, instead of at closing.
Can I use a seller note with an SBA loan?
Often yes, as subordinate debt. The lender and current SBA rules decide whether it must be on standby and how it counts toward equity.
What is the biggest risk with a seller note?
A payment schedule that strains cash flow once payments begin alongside the bank loan. Model it period by period before you sign.
Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.