“Full Standby Seller Note” and SBA Loans
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 loan is temporarily in “standby” status and does NOT require any payments from the buyer for a specified period of time.
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
- 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
Seller Notes – the New Rules for Full Standby
As of August of 2023, the SBA rules allow for seller-held debt on full standby to be considered just like down payment funds from a buyer as long as the loan is on full standby for the first 24 months of the loan.
Again, the primary purpose of this structure is to allow a buyer to come in with less cash (or NO 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 it down, then you might still be able to purchase the business and hang onto your cash if the seller is agreeable to the full standby structure.
Using Standby Debt to Purchase a Business with No Money Down
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, many 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 actually not in love with this new wrinkle as some view it as adding significant risk to the loan.
HOWEVER….there are 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. (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”?
Thus far, many of the SBA lenders that are willing to take full advantage of this new rule seem to be of the more opportunistic variety in that they are more expensive, but there are no absolutes and some lenders with attractive rates will certainly run across deals they are comfortable closing with this structure.
BTW, it is a fallacy that all SBA lenders that do business acquisitions only offer expensive floating rate loans in the range of Prime + 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.
What is true, is that if you need serious flexibility with the structure of your transaction, 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 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.
Re: when you can refinance as referenced above…”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.
So, if you had settle for a higher priced loan to get the deal done (and I am not saying that you need to), 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 traditional 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. 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 11.5%. 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 if you have a “strong” transaction, but again, if you don’t, 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 (January of 2024) 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.”
Also, at the time of this writing there is NO SBA Loan Guaranty Fee for loans under $1 million and there is a reduced fee for loans between $1 and $2 million. This fee reduction is good through Sept 30th of 2024.
So for the moment, a 7a to 7a refinance of under $2 million is almost like a 7a to conventional loan refinance because of the reduced fee structure.
Personal Guarantees and Why They Matter
So you might be asking yourself, “if I utilize a full standby seller note so I don’t have to put any money down when buying a business, 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 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 any 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 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