The short answer: Seller financing is when the seller lets you pay part of the price over time via a promissory note instead of all cash at closing. Notes typically cover 10%, 25% of the price at ~6%, 10% interest over 3 to 7 years. Paired with an SBA loan, a slice is often placed on full standby so it counts toward your equity injection. It cuts your cash and signals seller confidence, but expect a personal guarantee and default terms you'll want to negotiate hard.
What seller financing actually is
Instead of the seller getting 100% of the price in cash at closing, they "carry paper", a seller note you repay over time with interest. It's a loan from the person who knows the business best. That's why lenders and buyers love it: a seller willing to finance part of the price is betting on the business right alongside you.
The note is documented, secured against the business assets, and almost always personally guaranteed by you. It usually sits behind the senior lender (the bank or SBA) in priority, which is what makes banks comfortable with it.
A seller who won't carry any paper is quietly telling you what they think the business is worth.
Three ways a seller note can behave
The same note can be structured very differently depending on when the seller gets paid:
| Type | Payments | Counts as equity? | When to use |
|---|---|---|---|
| Full standby | None during the SBA loan; interest accrues | Yes, up to 50% of injection | To lower your required cash |
| Partial standby | Interest only for a set period | No | Seller wants some income sooner |
| Current-pay note | Principal + interest from day one | No (it's debt) | Non-SBA or above the injection |
Only a full-standby note reduces the cash the SBA makes you inject. A current-pay note is fine too, it just counts as debt, and its payment eats into your DSCR.
Worked example: seller note in the capital stack
A $1,000,000 business, SBA loan plus a $150,000 seller note split into two parts, $50,000 on full standby (counts as injection) and $100,000 current-pay (financing above the injection):
| Source | Amount | % of price | Notes |
|---|---|---|---|
| SBA 7(a) bank loan | $800,000 | 80% | Senior debt |
| Seller note, full standby | $50,000 | 5% | Counts as half the injection |
| Seller note, current pay | $100,000 | 10% | ~8%, 6-yr; payment hits DSCR |
| Your cash | $50,000 | 5% | Other half of the injection |
| Total | $1,000,000 | 100% | Bank loan shrinks as seller carries more |
More seller paper means a smaller bank loan and less of your own cash, but the current-pay slice adds a monthly payment, so check the deal still clears DSCR with the SBA loan calculator and confirm the price with the max purchase price calculator.
Terms to negotiate
- Interest rate: aim for 6%, 8%; sellers often start higher.
- Standby portion: push for full standby on at least 5% so it counts toward your injection.
- Default cure period: 30 to 60 days to fix a missed payment before remedies trigger.
- Right of offset: lets you reduce note payments if the seller's reps turn out false (e.g., undisclosed liabilities).
- Forgiveness clause: a forgivable seller note is written down (partly or fully cancelled) if agreed targets aren't met after closing, a key customer leaves, revenue falls below a floor, or promised transition support doesn't happen. It ties the seller's payout to the business actually performing, and it's one of the strongest protections you can negotiate. Comes up more often than buyers expect, ask for it.
- Subordination: agree the note sits behind the bank, required for SBA deals anyway.
Start from language the SBA already accepts, our seller note term sheet gives you a negotiating draft before the lawyers get involved.
The higher-price trade
Sellers frequently grant financing in exchange for a higher headline price. That can still be a great deal, cheap, patient capital is worth a premium, but run the total cost, not just the sticker. A note at a good rate beats stretching your cash and killing your reserves.
Negotiating a seller note?
Use a term sheet that already speaks the bank's and the SBA's language.
Frequently asked questions
The seller lets you pay part or all of the price over time via a promissory note instead of all cash at closing. You pay them with interest, and the note is usually secured by the business assets and your personal guarantee.
Notes commonly cover 10%, 25% of the price at ~6%, 10% interest over 3 to 7 years. With an SBA loan, part is often placed on full standby so no payments are made during the SBA term.
Only partially with an SBA loan. A note can count for up to 50% of the 10% injection, and only if on full standby for the life of the loan and documented on SBA Form 155. That's up to 5% of the price; your cash covers the rest.
A higher price in exchange for the financing, a personal guarantee, and default terms that can let the seller reclaim the business. Negotiate clear cure periods, offset rights for undisclosed liabilities, and subordination to the senior lender.
Sources
- SBA SOP 50 10 8 seller-note and standby rules, sba.gov 7(a) program; Windsor Advantage and Starfield & Smith (2025 to 2026).
- Seller-note terms and buyer protections, Morgan & Westfield and BizBuySell acquisition guides (2025 to 2026).
