Seller note as equity contribution in SBA deals

January 04, 2024

by a professional from Emory University in Atlanta, GA, USA

I am working with an investment fund for deals above $5M. However, for good deals sub $5M that require an SBA lender or bank finance, does anyone have any lender recommendations that consider the seller note as equity contribution or “skin in the game?”

Any leads will be most helpful!

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

The new SBA rules state that you can get away with $0 down so long as the seller carries back a note for at least 10% of the purchase price on full standby for a minimum of two years (meaning no required payments for at least two years). We have over 60 SBA funding partners we work with, and I can tell you in general, although the SBA is allowing 90% financing with no equity, most lenders are not allowing this except for some rare circumstances. We have plenty of lenders that will do the deal with 5% borrower equity so long as the cash flow and deal makes sense, but not a zero equity unless one of the following items exists (and even not necessary then with all deals): 1) The Borrower is an employee of the business already and is buying out the owner; 2) the Borrower has substantial direct industry experience; and 3) the deal is largely or fully backed by hard collateral like equipment, real estate, or outside personal assets under the personal guarantee.

I always want to be honest with people. If your goal is to get away with $0 down, it is an admirable goal. But if you are serious about buying a business, I would have plans in place to come up with a minimum of 5% to ensure success. I have seen lenders in the past state $0 down but then come back with an approval that requires a down payment after all, at which point you will have wasted time and money to get there. So be cautious and be prepared to put skin in the game up front if you want to secure a business, whether that is your cash, investor cash, or some sort of gift money. I am happy to discussion options for equity at any time at redacted Good luck!

Reply by a searcher
in Boston Metropolitan Area, USA

Glad I came across this post. Wasn’t aware the SBA extended the limit from a 2.5% min down to 0%..very helpful. I do know that there are lenders out there (not SBA) that will allow seller equity notes as the only form of equity, provided you or a partner has a fair amount of industry experience and the seller brings a heftier note of 30-40%, but even then you’ll have to fish for these lenders

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