The short answer: A seller note counts toward your 10% equity injection only if all three are true: (1) it is on full standby for the life of the SBA loan, no principal and no interest paid, (2) it is no more than 50% of the required injection, and (3) it is documented on SBA Form 155 or an equivalent standby agreement. Meet all three and the seller effectively finances half your down payment.
What "full standby" actually means
A seller note (or seller financing) is when the seller lets you pay part of the price over time instead of at closing. "Standby" describes how that note behaves relative to the SBA loan.
- Full standby = no principal and no interest is paid on the note for the entire life of the SBA loan. The balance simply waits.
- Partial standby = interest may be paid but principal waits for a set period. This does not qualify a note to count toward the injection.
- No standby = a normal note with regular payments. Fine for financing, but it counts as debt, not equity.
The logic is simple: if no cash leaves the business to service the note, the SBA is willing to treat it like equity, because it behaves like equity, it sits behind the bank and gets paid last.
A standby note lets the seller bet on the business with you. No payments until the bank is made whole.
The three rules, in detail
1. Full standby for the life of the loan
To count toward the injection, the note must accrue but pay nothing, no principal, no interest, until the SBA loan is fully repaid. Interest can accrue and be paid at the end, but not during the term. If the seller insists on receiving interest now, the note is not on full standby and will not count as equity.
2. No more than 50% of the injection
A standby seller note can cover at most half of the required equity injection. On a standard 10% injection, that means the note can supply up to 5% of the purchase price, and your own equity must supply the other 5%.
3. Documented on SBA Form 155
The standby has to be legally binding. Lenders document it on SBA Form 155 (Standby Agreement) or an equivalent, which subordinates the seller's note to the SBA loan and locks in the no-payment terms. A handshake will not do, get it papered. Our seller note term sheet gives you the language to negotiate before the lawyers draft it.
Standby ≠ counts toward injection, unless it's "full"
Sellers often offer a note "on standby" but mean a two-year principal deferral with interest still paid. That is partial standby and will not reduce your required cash. Confirm "full standby, life of loan" in writing.
Worked example: cutting your cash in half
A $1,000,000 business. The required injection is $100,000 (10%). Compare a cash-only deal to one where the seller carries $50,000 on full standby:
| Source | All cash | Half standby note |
|---|---|---|
| SBA 7(a) loan | $900,000 | $900,000 |
| Your cash injection | $100,000 | $50,000 |
| Seller note (full standby) | $0 | $50,000 |
| Note payment in year 1 | $0 (standby) | |
| Your cash out of pocket | $100,000 | $50,000 |
Same business, same bank loan, but your cash at risk drops from $100,000 to $50,000. And because the note is on standby, its payments are excluded from your debt service, which actually helps your DSCR. Model it with the SBA loan calculator and pressure-test cash flow in the DSCR calculator.
Why a seller would agree
Standby feels like a big ask, but motivated sellers say yes because:
- It often gets them a higher price, buyers pay more when they can get the deal financed.
- It signals confidence; a seller who won't carry any paper makes buyers nervous.
- It can spread their tax over multiple years (confirm with their CPA).
- Interest still accrues, they get paid, just after the bank.
Sellers who keep an ownership stake face a different issue: a seller retaining even 1% must give a full personal guarantee for at least two years. A standby note is not ownership, so it avoids that trap while still keeping the seller invested.
Negotiating a seller note?
Start from a term sheet that already speaks the SBA's language.
Frequently asked questions
The seller receives no principal and no interest for the entire life of the SBA loan. Because no cash leaves the business to service it, the SBA lets a full-standby note count toward the buyer's equity injection.
No more than 50% of the required injection. On a 10% injection, a full-standby note can cover up to 5% of the price; your own equity must cover the other 5%.
The SBA standby agreement that subordinates the seller note to the SBA loan and locks in the no-payment terms. A note must be documented on Form 155 (or equivalent) to count toward the injection.
Not if it's on full standby and counting toward the injection. Full standby means no principal and no interest paid for the life of the loan. Interest can accrue and be paid at the end.
Sources
- SBA SOP 50 10 8 seller-note-on-standby and equity-injection rules, sba.gov 7(a) program; Starfield & Smith and NAGGL analyses (2025 to 2026).
- Form 155 standby documentation and the 50% cap, Windsor Advantage & Pioneer Capital Advisory (2025).
