SBA + Seller Financing Full Standby Requirements Question

February 27, 2023

by a searcher from INSEAD in New York, NY, USA

If one were to purchase a business with at least the SBA-required 10% initial equity injection, and some other combination of SBA + Seller Note (say, 80% SBA loan, and 10% Seller Note), would the seller note be required to sit on full standby given that the equity requirements were met? Or could payments begin being made immediately?

Any SBA experts who can share their knowledge on full standby setups or SBA loans in general would be greatly appreciated!

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question. The only time a seller note is 100% required to be on standby is if the seller note represents part of the equity injection. You can in some cases get away with only 5% in buyer equity if the seller carries back a note on full standby for the life of the loan that is at least 5% of the purchase price. In order for that seller note to qualify as equity it needs to be on full standby for the life of the SBA loan.

So long as there is sufficient cash flow to support the repayment of the seller note and the bank debt based on the Bank required ratios (usually around 1.20 to 1.30x debt service coverage ratio on SBA 7A loans), you can have the seller note in repayment. If there is not sufficient cash flow, then you have options. You can put the seller note on standby or you can do a seller note on standby with a balloon. An example of this would be that the seller note is on standby but the note comes due / balloons at the end of 5 years. At that time you would be required to payoff the seller note, but if you did not have the cash flow to do so, that seller note is still subordinate to the Bank so the seller could not force you to pay them off. Often times the original bank is willing to do a second note to take out that seller note at that time. That is a way you can give the seller an out sooner rather than waiting for full maturity of the SBA 7A loan to get repaid on the seller note, but still not have that seller note impact cash flow. I do not recommend a balloon any sooner than year 4. If the loan balloons before Year 4 many lenders still include it in the debt service, but if 4 years or longer it is not included in the debt service.

I hope this helps to clarify. If you would like to discuss in more detail you can ping me here or directly at redacted Good luck with your search.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Sarah, thank you for tagging me. You can certainly have a seller note on standby that does not count as part of your equity injection. You can structure any seller note not counting as part of your equity injection however you would like so it works with the cash flow. Some lenders have strict rules on the terms they want to see with seller notes, but technically you have some flexibility on how you structure them. As for the interest during the two-year standby period, that is based on what you can negotiate with the seller. I would say more often that not the interest accrues during the first two years and is then paid over time, but sometimes the buyer negotiates where the interest does not start until after the two years are up. I hope this helps.

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