What is a seller note, and why do lenders like one?
A seller note is the portion of the purchase price the seller agrees to be paid later, with interest. It fills the gap between your cash and the bank's loan — and, structured the way SBA requires, part of it can count toward the money you are supposed to put in.
Why both sides use one
For you: less cash at closing. For the lender: evidence that the person who knows the business best still believes in it. For the seller: a higher achievable price, spread tax over years, and interest on top. It is the most common way a Main Street deal closes the gap between the asking price and what a bank will advance.
Standby is the word that matters
Under SBA's rules a seller note can count toward your required equity injection only if it is on full standby — no payments of principal or interest during the standby period — and it can cover no more than half of the injection requirement. A note with payments running from month one is still financing, but it is not equity, and it eats into your debt-service coverage instead of helping it.
That single distinction decides many deals. "The seller will carry $100,000" means one thing to your bank if the note is silent for two years, and something quite different if it pays monthly from closing.
What to negotiate beyond the amount
- Standby period and what happens after it. Interest accruing during standby, or forgiven? It changes the true price.
- Rate and term. Seller notes commonly run several years behind the bank loan; the total payment must still clear coverage.
- Right of offset. The most valuable clause you can win: if the seller's representations turn out to be wrong, you reduce the note instead of suing someone who has already spent the money.
- Security and subordination. The bank will be first; make sure what the seller holds does not block your operations.
- What happens on default — and whether the seller can take the business back, which is a very different deal from the one you thought you were signing.
The signal to read
A seller who refuses any note at all is telling you something about their own confidence in the numbers. It is not proof of a problem — retirees sometimes genuinely need cash — but paired with earnings that rest on unprovable add-backs, it is a pattern worth naming out loud.
The mirror image is also worth noticing: a very large seller note on a business with weak coverage can mean the price is not supportable by the earnings, and the seller knows it.
Questions buyers ask
Can a seller note count as my down payment on an SBA loan?
Partly. Under SOP 50 10 8 a seller note may count toward the required equity injection only if it is on full standby — no principal or interest paid during the standby period — and it cannot cover more than half of the injection requirement. The remainder must come from you or another qualifying source.
What is a right of offset in a seller note?
It lets the buyer reduce the balance owed on the note if the seller's representations prove untrue — undisclosed liabilities, overstated earnings, a customer who was already leaving. It is the practical alternative to suing a seller who has already spent the proceeds, and it is worth more than a small change in the interest rate.
Sources
Related
- Debt Service Coverage Ratio (DSCR) — DSCR is the cash a business produces divided by the loan payments it owes.
- Letter of Intent (LOI) — A letter of intent sets out the deal you and the seller believe you have agreed: price, structure, what is included, and how long you get to verify it.
- SBA 7(a) loan (business acquisition) — The SBA 7(a) programme is how most first-time buyers finance a Main Street purchase.
Checking a real deal? DealLoupe reads the documents a seller gave you and reports the red flags, the gaps and the questions to ask — before you spend anything on due diligence. See what a pre-screen costs →
Last updated: 2026-08-22