Updated October 23, 2026
Adam Hoeksema
Updated October 2026: SBA seller note rules have changed twice since this guide was first written. SOP 50 10 8 (effective June 1, 2025) and SOP 50 10 8.1 (effective October 1, 2026, for loans receiving an SBA loan number on or after that date) now set the rules. The key points:
• Buying a business (an “Initial Acquisition”) requires at least a 10% equity injection, and it cannot be reduced.
• At least half of that injection (5% of the project at the minimum) must come from “unlimited” sources like your own cash, a gift, or a personal loan repaid from outside the business.
• A seller note can count toward the other half only if it is on full standby for the entire term of the SBA loan: no principal or interest payments at all.
• Debt service coverage is tested on the business’s historical results. Lenders can no longer rely on your projections to qualify an acquisition.
• Total transaction debt, including any seller note that is not on full standby, cannot exceed the independent business valuation.
I have updated each scenario below to reflect these rules.
A Small Business Administration (SBA) loan is one of the most common ways to finance buying a business. Under the current rules (the full SBA SOP 50 10 if you need some light reading), a buyer can use an SBA loan to finance up to 90% of the total project cost of an acquisition.
The remaining 10% must be equity in the deal, BUT here is the kicker: a seller note on full standby can still make up half of that equity. So a buyer could, in theory, buy a business with 5% cash down, a 5% full-standby seller note and a 90% SBA loan.
Now most buyers will probably want to put down the minimum 5% equity injection and most sellers will want to have the smallest seller note possible that can still get the deal done. BUT keep in mind that the SBA lender might not be willing to finance 90% of the purchase price. Just because this 90%, 5%, 5% structure is possible doesn’t mean it is possible for your particular deal.
In this article I want to talk through some different scenarios for you to consider as you try to structure the financing of a business acquisition and how the SBA and a seller financing can work together in these various scenarios. Here are the different scenarios I plan to walk through:
Seller Notes on Full Standby
- Standard - SBA Loan 90%, Seller Note on Full Standby 5%, Buyer Equity Injection 5%
- No Seller Note - SBA Loan 90%, Buyer Equity Injection 10%
- Business Appraisal Too Low - SBA Loan < 90%, Seller Note on Full Standby > 5%, Buyer Equity Injection 5%
- Lack of Collateral - SBA Loan < 90%, Seller Note on Full Standby > 5%, Buyer Equity Injection 5%
- Business doesn’t Cash Flow - SBA Loan < 90%, Seller Note on Full Standby > 5%, Buyer Equity Injection 5%
- Buyer Lacks Financial Strength - SBA Loan < 90%, Seller Note on Full Standby 5%, Buyer Equity Injection > 5%
Seller Note NOT on Full Standby
- Seller note amortization matches bank note amortization - typically 10 years
- Seller note interest only payments for up to 3 years then fully amortizing over remainder of 10 years
- Seller note has no payments for X years then fully amortized over the remainder of 10 years.
- Seller note interest only over X years then a balloon payment (financed by bank)
- Any other combination that the buyer, seller, and lender can all agree on.
Before I dive into the nuances of these different deal structures and the reasons that you might structure a deal a certain way, I wanted to address why does finding the right deal structure matter when you are trying to buy (or sell) a business?
Let’s say you are a searcher trying to buy a business through a search fund, you will likely look at many, many businesses during your search and probably pass on many businesses because the price isn’t right. You will probably also try to buy several businesses and lose to the competition because your offer was not the best offer. So when you are in a competitive search process you need to have the best offer possible which means you need the best financing structure possible.
That means that you may need to get creative.
The “standard” 90/5/5 SBA loan, owner equity and seller note structure might not be the best offer that works for the buyer, seller and bank, so if you want to close the deal, you might need to consider other scenarios.
Before I dive into the various SBA loan and seller financing structures I need to define a couple of important terms.
What is a Seller Note?
A seller note, in the context of a business acquisition, is when the seller of the business agrees to receive a portion of the sale proceeds over time through a series of payments. Commonly a seller note is used in conjunction with an SBA loan. For example, if you are buying a business for $1,000,000, you might get an SBA loan for $900,000, invest $50,000 of your own savings, and use a seller note for the final $50,000. In this scenario the seller would receive $950,000 on the day of the sale, and would receive the remaining $50,000 from the seller note over a period of time. There are many possible payment structures on a seller note, but one of the most common structures is to have the seller note on “full standby” to the bank loan.
What is a Seller Note on Full Standby?
A seller note on full standby means that the seller will not receive any payments of principal or interest until the bank is repaid in full. Using the example above with a $900,000 SBA loan, the entire SBA loan would need to be repaid before the seller could receive any of the final $50,000 from the seller note. Commonly an SBA loan used for an acquisition has a 10 year term which means the seller would be waiting 10 years to start receiving payments in this scenario.
Under current SBA rules, a seller note has to be on full standby for the life of the loan if it is being counted toward your required equity injection. A seller note that is not counted as equity can have payments, but those payments are included in your debt service. Seller notes in SBA deals are typically documented with SBA Form 155, the Standby Creditor’s Agreement, which spells out the payment terms. As I walk through the following scenarios and structures you will get to see situations where seller financing will be on full standby and situations where there might be more flexibility.
Seller Note Example
An example of a seller note structure is for the note to accrue interest for 10 years with no payments until the SBA acquisition loan is fully repaid, then the seller note might fully amortize in the following 5 years so that the seller note would be fully repaid in 15 years.
You can find some example Seller Note Clauses.
SBA Loan Structures for Business Acquisitions
Now we are going to walk through many of the most common structures for using SBA loans and seller financing to buy a small business. This is not an exhaustive list and you will see that depending on the situation you can get pretty creative, but these are scenarios that you can consider as you try to come up with a winning deal structure for the buyer, seller and bank.
I also found this article helpful: Best Practices: Seller Notes and Standby Agreements (note that it was written in 2022, before the 2025 and 2026 rule changes).
SBA Loan Scenarios with Seller Note on Full Standby
I am going to start by looking at scenarios and structures for SBA loans where a seller note is on full standby. In 2023 the SBA loosened its seller note rules, which we covered in the video below.
Note: the 2023 changes covered in this video were reversed by SOP 50 10 8 in June 2025. A seller note counted as equity must now be on full standby for the entire life of the SBA loan, as described above.
Standard SBA Loan and Seller Note for Buying a Business
In this scenario the source of funds for the acquisition of the business would be:
- 90% SBA Loan
- 5% Seller Note on full standby
- 5% Buyer Equity Injection (cash)
I am calling this first structure the standard because this is probably the default structure that each deal starts with and then based on the specific details of the deal you might make adjustments from this standard structure.
This is likely the scenario you would end up with under the following circumstances:
- Business has sufficient historical cash flow, measured by a debt service coverage ratio of at least 1.25
- Loan has sufficient collateral, enough to consider the loan fully collateralized
- Buyer has a good credit history and a healthy cash reserve
Also, this structure is probably most common when the deal is solid, but not the best deal you have ever seen from the lender’s perspective. If the deal is too strong, then banks might start competing for the deal and find creative ways to make the deal more favorable to the buyer and/or seller in order to win the deal.
SBA Loan with no Seller Financing
In this scenario the source of funds for the acquisition of the business would be:
- 90% SBA Loan
- 10% Buyer Equity Injection
I know I am supposed to be talking about seller note structures, but I did just want to mention that not all deals will have seller financing. If there are multiple buyers bidding for the same business, the seller may not be interested in accepting an offer that includes a seller note, especially if the note is going to be on full standby.
SBA Loan and Seller Note Structure when Business Appraisal is Lower than Purchase Price
In this scenario the source of funds for the acquisition of the business would be:
- Less than 90% SBA Loan
- Greater than 5% Seller Note on Full Standby
- Greater than 5% Buyer Equity Injection
When the business is valued at less than the purchase price, the lender is not going to finance more than what the business is worth. Under SOP 50 10 8.1, the valuation must be prepared for the lender by an independent, credentialed appraiser when the purchase price is more than $350,000 (or the buyer and seller have a close relationship), and total transaction debt, including any seller note that is not on full standby, cannot exceed that valuation. Any part of the price above the valuation has to be covered by buyer equity or a seller note on full standby. So when you have a business that you want to buy for $1,100,000, but it appraises for $1,000,000, the buyer and seller will need to fill the $100,000 gap above the valuation, plus the required equity injection. Whether the buyer or the seller fills that gap with a larger seller note or a larger equity injection really depends on who has the most leverage in the deal. If there are multiple offers on the table for the business, then the buyer will probably have to fill the gap. If this is the only offer on the table, then the seller will probably fill the gap with a larger seller note.
SBA Loan and Seller Note Structure when Loan is not Fully Collateralized
In this scenario the source of funds for the acquisition of the business would be:
- Less than 90% SBA Loan
- Greater than 5% Seller Note on Full Standby
- Greater than 5% Buyer Equity Injection
The SBA does not allow a lender to decline a loan solely because of a lack of collateral, but a thin collateral position can still lead a lender to offer a smaller loan. Lenders are also required to take a lien on available equity in the buyer’s personal real estate when the loan is not fully secured by business assets. If the SBA loan ends up below 90% of the project cost, the buyer or seller will need to fill the gap.
SBA Loan and Seller Note Structure when Business doesn’t Cash Flow
In this scenario the source of funds for the acquisition of the business would be:
- Less than 90% SBA Loan
- Greater than 5% Seller Note on Full Standby
- Greater than 5% Buyer Equity Injection
Another reason that the SBA loan might be less than the maximum of 90% is that the business doesn’t cash flow. What does this mean? It means that based on historical financial data, plus the new proposed debt financing, the business is not able to reach a debt service coverage ratio of 1.25. This is a measure that is commonly used to determine whether a business can comfortably service its debts. If the business struggles to cash flow the proposed SBA loan, then ways to improve cash flow would be to increase the amount of the seller note and put it on full standby so that the business doesn’t have to make any payments to the seller until the bank loan is repaid in full. Learn more about SBA Cash Flow Requirements
The bank is going to look at the historical financials of the business (the last fiscal year or a two-year average), apply the new debt service to those financials, and calculate the debt service coverage ratio. Lenders now have to use the highest quality financial statements available: audited, then reviewed, then compiled, and only then tax returns.
Under the rules that took effect October 1, 2026, lenders can no longer use your projections to qualify an acquisition (with a narrow exception for owner-occupied special purpose properties like hotels or self-storage that are fully secured by the real estate). If you plan to save $50,000 a year by moving the business into a building you already own, that is a great story for your business plan, but the historical numbers still have to support the loan on their own. Our free Acquisition Financial Projection Template lets you enter the company’s historical financials, test the debt service coverage ratio with different loan amounts and seller note structures, and then show your post-close plan. Learn more about SBA cash flow requirements.
SBA Loan and Seller Financing Structure when Buyer Lacks Financial Strength
In this scenario the source of funds for the acquisition of the business would be:
- Less than 90% SBA Loan
- 5% Seller Note on Full Standby
- Greater than 5% Buyer Equity Injection
When the buyer has less than ideal credit history, less than ideal cash reserves, collateral or net worth, the lender may not approve a loan worth 90% of the purchase price, but the seller may also not want to fill the gap in this situation since it is the buyer’s lack of financial strength that is creating the gap. That means the buyer is probably going to have to fill the entire gap with additional equity invested in the deal. Keep in mind that the buyer’s portion has to come from “unlimited” sources such as cash, a gift, or a personal loan repaid from outside the business, and at least half of the required injection must come from those sources.
SBA Loan Structures with Seller Note Not on Full Standby
Now there are some situations where you can get an SBA loan without the need to put the seller financing on full standby. The key question is whether any of the seller financing was being counted toward the 10% equity injection requirement. If for example, the buyer injects the full 10% of the equity required in the deal, then there could still be a separate seller note and that seller note may not need to be on full standby.
For example, let’s say that the lender is going to finance $800,000, the buyer invests $100,000 of equity and the seller provides a $100,000 seller note. Since the buyer is putting in 10% of the million purchase price, the seller note would not need to count toward equity. So now we can get more creative with how the seller note is repaid. Two current rules to keep in mind: the total of the SBA loan and any seller note that is not on full standby cannot exceed the independent business valuation, and the seller note payments will be included when the lender calculates your debt service coverage ratio. Here are some possible structures for seller notes that are not on full standby.
Seller note amortization matches bank note amortization - typically 10 years
Assuming that the business can cash flow both the bank loan and the seller note at the same time, then you could match the seller note amortization with the bank note amortization which is typically 10 years.
Seller note interest only payments for up to 3 years then fully amortizing over remainder of 10 years
If cash flow is tighter in the first few years post acquisition you may be able to structure interest only payments for the first few years and then fully amortize the loan over the remaining term of the bank note. Be aware that under SOP 50 10 8.1, interest-only transaction debt that is not on full standby must be underwritten as if it amortizes over 10 years, so an interest-only period helps your actual cash flow but not your DSCR calculation.
Seller note has no payments for X years then fully amortized over the remainder of 10 years.
Similar to the last option, but you could structure it so that the seller note has no payments initially and just accrues interest and then is fully repaid of the remaining period.
Seller note amortization over 10 years with a balloon payment at year 5
Sometimes a lender is willing to pay off the seller note early, so what you might do is structure the seller financing to be repaid over a 10 year term, but after 5 years or some other time period you could work with the bank lender to provide a lump sum to just pay off the seller note with a balloon payment. Lenders would be willing to do this if the business is performing well. Lenders want to make loans to good businesses, so just as one lender might refinance another bank’s debt, they would also refinance a seller note if things are performing well, and assuming the seller note is not required to be on full standby by the SBA. If you plan to refinance a seller note with SBA financing, the current rules require a 36-month waiting period after the acquisition (up from 24 months), and the refinance must improve the payment by at least 10%.
Any other combination that the buyer, seller, and lender can all agree on
Finally, there are endless combinations of potential structures that might work if the business appraises well enough, cash flows well enough, has sufficient collateral and has strong borrowers. It can be a fun exercise to take our Acquisition financial model and just play around with lots of different scenarios to see what structure might work best for everyone and hopefully allow you to win the deal.
Structuring an SBA acquisition? Model your seller note, equity injection and DSCR with our free Acquisition Financial Projection Template.
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Shopping for a lender? Use our free SBA Lender Finder to see which lenders are most active in your state.
If you have any questions about how to enter a specific scenario into one of our financial forecast spreadsheets just reach out and we can help!
