A seller note is a loan the seller gives you to help buy their business. Instead of getting 100% cash at closing, the seller carries part of the price as a note you repay over time with interest. In an SBA 7(a) deal, the seller note sits behind the SBA loan, and if it's on full standby (no payments) for the first two years, the SBA lets it count toward your down payment.
This term sheet captures the deal terms; your attorney turns it into a promissory note and security agreement.
Download the Term Sheet (Word)
When you use a seller note
Seller financing shows up in most SBA acquisitions for two reasons. First, it lowers the cash you need at closing, a seller carrying 5 to 10% of the price means less out of your pocket. Second, it keeps the seller invested in a smooth handover: they don't get fully paid until the business keeps performing. If you're structuring the down payment, run the numbers in the SBA loan calculator and confirm the combined debt still clears the DSCR test.
Full standby, in one line
The SBA requires at least a 10% equity injection on a business acquisition. Up to half of that (5% of project cost) can come from a seller note on full standby meaning zero principal and interest payments for the first 24 months. That standby is what lets the note count as equity. Read the full mechanics in our seller notes & full standby guide.
The seller note term sheet
SELLER NOTE, TERM SHEET
Non-Binding Summary of Proposed Seller Financing Terms
| Term | Proposed |
|---|---|
| Borrower | [Buyer / acquisition entity name] |
| Lender (Holder) | [Seller name] |
| Principal amount | $[Amount], [e.g., 8% of total purchase price] |
| Interest rate | [6 to 10]% per annum, fixed [simple interest / on outstanding balance] |
| Term | [Number] years from the closing date |
| Amortization | Fully amortizing over [Number] years / [equal monthly payments after standby] |
| Standby period | Full standby, no principal or interest, for the first 24 months (required for the note to count toward the SBA equity injection) |
| Payment start | Month [25], following the standby period |
| Payment schedule | Monthly payments of $[Amount], due on the [1st] of each month |
| Interest during standby | [Does not accrue] / [accrues and is added to principal, confirm what the SBA lender permits] |
| Security / collateral | [Unsecured] / [second-position lien on business assets, junior to the SBA lender] |
| Subordination | Subordinate to the SBA 7(a) loan; Seller to sign the SBA-required Standby / Subordination Agreement |
| Personal guarantee | [Personally guaranteed by Buyer] / [guaranteed by the acquisition entity only] |
| Prepayment | Prepayable in whole or in part at any time without penalty (subject to standby restrictions) |
| Default | Non-payment beyond a [10]-day cure period; cross-default with the SBA loan; remedies subject to the subordination agreement |
| Late fee | [5]% of the overdue payment / $[Amount] |
| Assignment | Note may not be assigned by Seller without Borrower and SBA lender consent |
| Governing law | State of [State] |
Term-by-term notes
Principal
How much of the purchase price the seller is carrying. On SBA deals this is often 5 to 15% of the price. Remember: only up to 5% of total project cost, on full standby, counts toward your 10% equity injection.
Interest rate
Negotiable, commonly 6 to 10%. Higher rates cost you more but can help you win a lower headline price. The rate must be reasonable for an SBA lender to approve it.
Standby period
The heart of an SBA-eligible seller note. Full standby means no principal and no interest paid for 24 months. If the note pays interest during that window, it generally won't count toward your equity injection, confirm the exact treatment with your SBA lender, because policies and whether interest accrues can vary.
Security & subordination
The SBA lender is always in first position. Any collateral for the seller note is junior, and the seller signs a standby/subordination agreement the SBA lender approves. Many seller notes on standby are effectively unsecured during the standby period.
Personal guarantee
Sellers often want your personal guarantee on the note; you'll want to limit or avoid it. This is a real negotiation point, weigh it against price and standby terms.
Confirm standby mechanics with your SBA lender
SBA rules and individual lender overlays change, including whether interest may accrue during standby and how the equity injection is calculated. Get your lender's written requirements before you finalize the note, the wrong wording can disqualify the note as equity.
How to use this template
- Agree the terms first. Fill in the table with the seller, then hand it to your attorney and lender. It's cheaper to align on a one-page term sheet than to redraft a promissory note.
- Coordinate with your SBA lender early. The standby and subordination terms have to satisfy the lender, so loop them in before you promise the seller anything.
- Model the payment. Add the note payment (after standby) to your SBA loan payment and re-check DSCR the business has to carry both.
- Turn it into real documents. The term sheet is a summary; the binding instruments are the promissory note, security agreement, and the SBA standby/subordination agreement, all drafted by counsel.
Use the note to win the deal
A seller who carries a note on standby is telling the lender they believe in the business, which strengthens your financing. Offering a slightly higher price with more seller financing can beat a lower all-cash offer, and it lowers the cash you need at closing.
This term sheet is educational and not legal, tax, or financial advice, and it is not an SBA policy statement. SBA rules and lender requirements change. Have a qualified attorney and your SBA lender review and paper the note before you sign.
Frequently asked questions
The seller receives no principal or interest for a set period, usually the first 24 months. Because no payments leave the business, the SBA lets a full-standby note count toward the buyer's required equity injection, which is why buyers with less cash use it. See our full standby guide.
Commonly 6 to 10%, and it's negotiable. The rate must be reasonable, and in an SBA deal the note is subordinate to the SBA loan. A higher rate can be a fair trade for a lower price or longer standby.
Yes. The SBA lender is repaid first, and the seller signs a standby/subordination agreement the lender approves. The seller note is junior collateral, if it's secured at all during standby.
Usually yes, and most seller notes have no prepayment penalty, but the standby period restricts payments during those first months. After standby ends, you can typically pay it down or off whenever cash allows.
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Last updated: July 2026 · Reviewed by the Acquisition Ace team