“Full Standby Seller Note” and SBA Loans
Updated May 22, 2025 to reflect upcoming changes to the SBA Rules regarding seller held debt and the use of a full standby seller note in SBA lending.
In SBA loan terms, a “full standby seller note” is most often used to refer to a note held by the seller of a business to make a business acquisition loan either easier to approve or, in some cases, just plain possible.
“Full Standby” means that the seller note is in “standby” status and does NOT require any payments from the buyer for a specified period of time.
Please Note: If you currently own a business and you are expanding by purchasing someone else’s business in the exact same industry, in the same general geographic area and with the exact same ownership, then you DO NOT need a down payment or a seller held second on standby. Please visit our business purchase page on our main site for more info re: this.
Benefits of a Seller Note:
The reasons it makes a business purchase easier are:
- it reduces the amount of cash a borrower needs to get an SBA loan closed
- it can actually eliminate the need for a borrower to bring ANY cash to closing, although this is changing as of June 1st, 2025 (see New Rules below).
- it shows that the seller of a business still has a vested interest in the success of the business beyond closing, because if you – as the new owner – fail to operate the business as capably as the seller, then the seller will not receive the remaining monies owed to them via the standby note
- It can serve to motivate a seller to be cooperative during the loan process to help get the loan closed
SBA Seller Note – the New Rules for Full Standby
As of June 1, 2025, SBA seller financing requirements will be changing for the 2nd time in a few years. The new rules for “seller-held debt on full standby” are actually a return to the old rules.
Up until June 1, 2025 the “SBA seller note rules” allow the seller of a business to hold the full amount of the required down payment to be on full standby for just 2 years. This rule has enabled lenders to underwrite loans using seller held funds in the form of a standby note to fully satisfy the SBA loan requirements for down payment or equity injection when a business was being sold.
To put it more simply, this meant that someone buying a business with an SBA loan did not need a down payment (at all).
Well, the new rules for seller held notes still require the seller note to be on standby, but the note must be on “full standby for the life of the SBA loan” AND the buyer must put down at least half of the required down payment.
The typical minimum equity injection when using an SBA loan to buy someone else’s business is 10%, which nows means – after June 1st of 2025 – that most buyers will need to put in 5% if they are utilizing a seller note on full standby.
A few things to point out here which might help this news seem less gloomy:
- this new rule is actually the old rule for how seller held debt on standby was treated just a few short years ago, and it worked fine for thousands of transactions.
- asking a seller to hold 5% is not a big ask, as the seller is still receiving 95% of the purchase price of the business at the time of the sale and many will receive the other 5% in the not too distant future…
- I say “not too distant future,” because if you are buying just the business, then this type of SBA loan is only a 10 year loan with NO prepayment penalty and many buyers take excess cash flow and pay the SBA loan off before the 10 years has come to pass, so naturally, payments could start to be made sooner on the seller note.
- Many borrowers will refinance the loan as soon as they can prove they are a capable and profitable owner. This is something many SBA borrowers look to do, since many SBA loans are based on the Prime Rate, which can be volatile, so once the business owner has a track record of profitable operations they are typically looking to get a more stable and hopefully lower rate.
- If you are buying a business that comes with real estate, the loan term is much longer (25 years if real estate is larger percentage of sale price), but the prepayment penalty is very short (no prepayment penalty after 3 years and a 1% penalty after 2 years). Again, creating a situation where you could refinance relatively quickly.
- This last one is very important: SBA rules for where you can source your down payment from, are what can be described as very flexible as the money can sometimes be borrowed, be a gift, can come from investors, retirement account rollovers, etc., so there could be ways for many business buyers to creatively come up with the required 5% down payment. Of course, lenders still need to be smart about how they underwrite and must be careful not to take any unnecessary risk, so if you are not bringing any of your cash savings to the closing table, then you better have some number of other qualities (the right experience, solid reserves, very capable managment, excellent credit or possibly, etc.) to increase your odds of approval.
Do Seller Held Notes = Defaults?
As exciting as it was to be able to help people purchase a business with nothing out of pocket, perhaps it was too good to be true.
I have not seen any official statistics yet that detail what percentage of loan defaults involved transactions where the seller, in effect, held the down payment, but I suspect there were a lot. The default rate for SBA 7a loans is typically very, very low (approx 1.25% in 2022) and it is not far from 4% at the current time.
I suspect that many of the defaults were probably transactions that included seller held notes for 10% of the business purchase price and to borrowers with limited liquidity.
There is likely a lot of to be said for having enough “skin in the game.”
Meanwhile…back to the Old Way
Agian, the primary purpose of the standby debt structure is to allow a buyer to come in with less cash when buying someone else’s business, which from a lender’s perspective can be a good thing – assuming the borrower has sufficient cash available for other business needs. i.e. it protects the buyer’s liquidity both pre and post-closing.
So, if you are buying a business and you either do NOT have the typical 10% cash down payment that SBA requires or you actually have the 10% (or part of it), but you do not want to put all of it down, then you might still be able to purchase the business and hang onto a lot of your cash if the seller is agreeable to the new full standby structure.
Using Standby Debt to Purchase a Business with No Money Down
The following paragraph is soon to be out of date as it was published after the rules for standby debt were “loosened” a few years ago:
As you might imagine, this new tweak to the rules regarding standby debts has made it more possible for certain buyers to purchase a business without the typical 10% down payment required by SBA.
Prior to August of 2023, if a borrower was looking for help from a seller in the form of a note on full standby, the SBA rules not only required that the note be on full standby for the life of the loan, but also required that the borrower come to the closing table with half of the required down payment, which was usually 5% of the purchase price.
In fact, some SBA lenders are still utilizing this structure as it gives them a better level of comfort that the borrower has enough “skin in the game.”
How Many Lenders Are Actually Utilizing the New Rule?
The vast majority of SBA lenders are starting to warm to this new wrinkle, but there is a significant percentage who view it as adding significant risk to the loan.
There are, however, very definitely lenders who are allowing it, because after all, this is capitalism we are talking about, and if the SBA guidelines say you can do it, then there will be lenders who will use the SBA rules to the fullest extent they can to get deals done.
Full Standby Notes Aren’t For Everyone
In general, SBA lenders want borrowers to be “invested” in the success of a business and the primary way they insure that is by having the borrower inject enough of their own hard-earned cash up front. (Ideally, enough cash that it would be painful for them to bail should things go poorly post-closing).
That being said, no SBA lender has the exact same underwriting standards as any other SBA lender and for various reasons, some lenders are willing to approve riskier loans.
So What is “the Catch”?
Answer: sometimes flexibility is more expensive.
Some SBA lenders who took full advantage of the new (soon to be old) rule were certainly of the more opportunistic variety in that they would impose a higher rate on a borrower in return for more flexibility in underwriting. This would have made the lender more money, but it may have hurt a borrower’s ability to repay the debt and it may have led to higher defaults.
The lesson to be learned is that lenders need to be prudent about how they underwrite…and borrowers need to really be sure about what they are signing on for as defaulting on an SBA loan is not something you want to do.
BTW, there seems to be a lot of misinformation floating about online re: what kind of interest rates these loans carry.
The reality is that some SBA lenders could be a full 4% lower than others.
Yes, 4%.
It is a fallacy that all SBA lenders that do business acquisitions only offer expensive floating rate loans in the range of Prime plus 2 or 3%. It is just not true. It is more typically the case that expensive lenders are more aggressive in pursuing business acquisitions, because they know that a lot of the more conservative lower price lenders prefer easier/less risky deals, so the expensive lenders can be expensive and still close a lot of loans.
Anyway, the good news is there are actually many lenders with attractive rates who will certainly fund transactions with standby debt in place.
If you need serious flexibility with the structure of your transaction, however, or you have a transaction that is not “solid” enough for a more conservative, lower-priced lender, then you will typically end up paying a higher rate. How much higher really depends on all of the factors involved. i.e. the “5 C’s of credit” and all that.
BUT…you should know that if you have to settle for less than great terms, it is NOT a “forever thing,” because as stated above, SBA business purchase loans that either do NOT include real estate or where the business purchase is a greater chunk of the total amount being financed, do NOT have a prepayment penalty…so, you are free to refinance the loan as soon as you are able.
Terms For Business Purchase with a Seller Note
SBA business acquisition loans are typically 10 years.
SBA loans that finance real estate are typically 25 years.
SBA loans that include both are a blended term between the two.
SBA loans that include goodwill, real estate, inventory, equipment, working capital, etc. are also a blended term.
With regard to refinancing “as soon as you are able,” as soon as you are able typically means after about a 1.5 years, because that is usually enough time to prove that you are doing well with the business and hopefully by then you will have a full years’ tax return with sufficient cash flow to prove it.
That being said, deciding if you are a good risk (worthy of a refinance) is always a judgement call for any kind of lender – SBA or conventional – so if you find a lender who wants to give you better terms at any time after the purchase of the business, then by all means, go get it.
Refinance an SBA 7a Loan with Another SBA 7a loan
Possible Exit Strategy
By the way, you can refinance an SBA 7a loan with another SBA 7a loan. Yes, it’s true, even though many lenders will tell you that you can’t.
So, if you have a 7a loan and you had to settle for a higher priced loan to get the deal done, it could be that refinancing into another 7a loan is the right move. Especially, if you have not had any luck refinancing the loan with raditional bank financing.
In this case, you might want to look into a refinance with a more conservative SBA 7a lender with better terms.
Many borrowers think that SBA lenders and SBA loan rates and terms are all basically the same. Again, NOT true. Not true at all.
When it comes to pricing and rates, SBA lenders are a lot like conventional lenders in that they have a lot of control over what rates they are willing to offer.
Right now, in the current market, SBA 7a loan rates for a business acquisition – with or without real estate or a seller-held standby note – could be anything from approx 6.5% to 10.5%. That’s a ridiculously wide range, but it is because SBA 7a lenders come in all shapes and sizes, have different costs of capital, different business models and different risk tolerances.
So again, it is actually possible to get a “really good rate” on a 7a loan when acquiring a business, with or without seller financing, if you have a “strong” transaction. If however, you do not have a strong transaction, just know that there could be better terms available to you in the not so distant future in the form of another 7a loan.
In fact, we are working on numerous transactions right now (May 2025) where borrowers have Prime Rate-based, floating rate 7a loans in the 10 to 11% range and we have lenders who can offer non-Prime Rate-based fixed rate 7a loans in the high 6’s to mid 7’s for the “right deal.”
A Note About Personal Guarantees and Why They Matter
So you might be asking yourself, “if I have an agreement with a business owner to purchase their business utilizing a full standby seller note so I don’t have to put the full 10% down, and then the business ends up going south, then what recourse does a lender have to come after me?”
In this case, you may still have something to lose, because SBA loans are “recourse loans,” meaning that anyone who owns 20% or more of the business must “personally guarantee” the loan, and a personal guarantee obviously includes assets of the borrower which can sometimes include equity in real estate – including your primary residence.
Lenders cannot put a lien on a primary residence in the State of Texas due to Texas state laws, but they can in every other state, however, they will typically only do so if you have 25% or more equity in your residence.
25% Equity is determined by subtracting what you owe (or what you could potentially borrow) between a first mortgage and a second mortgage or home equity line of credit, from the appraised value of your property. So, if you have a first mortage below 75% loan to value, but you have a HELOC with available credit over and above 75% LTV then a lender should not put a lien on your property.
Bottom line, you need to be aware of what’s at stake if using a full standby seller note to avoid putting more cash into the business purchase, because you might still have something to lose.
FYI: if you do not own any real estate then it does not mean you cannot get a loan. It is just that if you do own real property and you have “available” equity the SBA forces lenders to put a lien against the property to backstop the deal.
If you have any questions about full standby seller notes as they relate to SBA loans, then feel free to email me at jking (at) green commercial capital (dot) com or call us at 1-800-414-5285.
You can also visit our main website for much more information re: SBA 7a and 504 loans at: greencommercialcapital.com