Seller Financing: Bridging the Gap in SBA Business Acquisitions

Financing a business acquisition often feels like a balancing act between what you can afford and what the seller expects. While SBA 7(a) loans cover up to 90 percent of the total project cost, many buyers need a way to finance the remaining gap. That’s where seller financing comes in. A seller note—sometimes called seller financing—is a promissory note issued by the buyer to the seller as part of the purchase price. Structured correctly, it can close funding gaps, align incentives and keep cash flow manageable.

How Seller Financing Works

When a buyer obtains an SBA loan to buy a business, the lender will evaluate the enterprise value and cash flow to determine how much of the purchase price they will finance. The difference between that amount and the total price must come from equity and subordinate debt. Seller financing often fills this gap—the seller agrees to defer a portion of the sale proceeds in exchange for a note that pays interest and principal over time.

Because the seller is subordinated to the SBA lender, terms must be carefully structured. In practice, the interest rate on seller notes is often in the 6–8% range, and sometimes even lower than the SBA loan rate. Amortization periods typically run five to ten years, with some notes structured to allow an initial interest-only period.

In SBA transactions, the seller note must be subordinated to the SBA loan. A Standby Creditor’s Agreement formalizes that subordination and ensures the seller cannot collect payments if the buyer defaults on the senior loan. Under updated SBA rules, a seller note can only count toward the required 10 percent equity injection if it is on full standby for the entire life of the SBA loan and does not exceed 5 percent of total project costs. In other words, at least half of your down payment must be cash from you or your investors. The note cannot receive any principal or interest payments until after the SBA loan is paid in full. When structured this way, the seller note reduces the amount of cash you need to close without jeopardizing loan approval.

Benefits for Buyers and Sellers

Seller financing offers clear advantages:

• Lower cash requirements. By deferring part of the purchase price, you avoid putting all of your liquidity into the deal. You preserve working capital for growth and unforeseen expenses.
  
• Alignment of interests. When the seller remains financially invested, they have an incentive to ensure the business continues to perform. They may stay on during a transition period to train you and preserve customer relationships.
  
• Tax deferral for sellers. A seller who receives payments over time can spread out capital gains taxes. They may also earn additional interest, improving their return.
  
• Improved lender perception. Lenders view seller financing as a vote of confidence. If the seller is willing to defer payment, it signals that they believe in the business’s future and your ability to run it.
  

Structuring Seller Notes 

A well-structured seller note should fit your cash flow. Common structures include level amortization (equal payments throughout), interest-only periods (lower payments initially) and balloon notes (small payments with a larger payoff at the end). In SBA deals, a seller note can count toward up to 5% of the total project cost as part of the required 10% equity injection—but only if it is on full standby for the life of the SBA loan. Any seller note provided in addition to the 10% equity requirement can be structured more flexibly, directly between buyer and seller, without standby requirements.

Aligning the term of the seller note with the SBA loan term simplifies cash flow planning and avoids a note coming due before the senior loan. Negotiate an interest rate that reflects the risk without overburdening cash flow. Remember that any payments on the seller note must always be subordinate to SBA debt; even after the standby period ends, you cannot pay the seller if doing so would reduce your debt service coverage ratio below the lender’s requirement.

Include key terms in the purchase agreement and promissory note: interest rate, repayment schedule, default provisions, collateral (if any) and standby conditions. The note should specify that no payments will be made without the lender’s written consent. A clear, well-drafted note reduces misunderstandings and protects both parties.

Best Practices and Pitfalls

• Perform due diligence. Use the due diligence period to verify the business’s earnings and cash flow. Consider commissioning a quality of earnings report to uncover any discrepancies before agreeing to a note.
  
• Avoid earnouts. SBA rules prohibit payments contingent on future performance. Seller notes must have fixed repayment terms, not tied to revenue or profits.
  
• Communicate with your lender. Share the proposed seller note terms with your lender early. They will need to review the Standby Creditor’s Agreement and ensure the note aligns with SBA guidelines.
  
• Plan for cash flow. Project your debt service coverage ratio under various scenarios. Make sure the combined payments on the SBA loan and seller note fit within your projected cash flow.
  
• Use professionals. Engage an attorney and an experienced SBA loan broker. They can help draft the note, negotiate terms and navigate SBA compliance.
  

How Pioneer Capital Advisory Can Help

At Pioneer Capital Advisory, we specialize in structuring seller financing as part of SBA acquisition loans. We’ll help you decide how much to finance with a seller note, ensure the terms meet SBA and lender requirements and coordinate the necessary agreements. Our team works with both buyers and sellers to align interests, protect cash flow and close deals smoothly.

Ready to Close the Gap?

Seller financing can make the difference between closing a deal and walking away. By understanding how seller notes work, negotiating fair terms and following SBA rules, you can bridge funding gaps and secure the business you want. Contact us today to discuss your acquisition strategy and find out how we can help you structure a seller note that complements your SBA financing.

Closing Section

Seller financing is more than a bridge—it’s a strategic tool that can align incentives and unlock acquisitions that might otherwise be out of reach. By understanding how to structure seller notes, comply with SBA rules and forecast cash flow, you can use seller financing to your advantage. At Pioneer Capital Advisory, we guide buyers through every step of the process, from negotiating terms to preparing Standby Creditor’s Agreements and securing lender approval. Reach out today to learn how we can help you bridge the gap and close your acquisition with confidence.