Seller Note Prepayment Incentive

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April 24, 2026

by a searcher from University of California, Berkeley - Haas School of Business in Los Angeles County, CA, USA

Has anyone seen or used a forgivable seller note structure to create SBA-compliant prepayment incentives for the buyer? I'd like to create a structure where the seller forgives portions of the seller note principal if the buyer meets agreed-upon prepayment hurdles. You could structure this a few different ways (e.g., $X pay-down above minimum payments, year-by-year hurdles, etc.), but I'm first just trying to understand if there's any allowable way to accomplish this.
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
As others have said, lenders will have difficulty accepting this structure. Few errors/oversight that I have seen in FN. 1) Make them with zero interest. I am not a lawyer, but zero interest is legal on contingent payments. Have tested this on SBA deals. If there is interest, the interest burden could be material if the FN does not kick in. 2) FN is after-tax dollar. Make sure financial model recognizes that. 3) Typically, FN is tied to growth. Working capital and CapX funding often does not leave cash to service FN. Good financial model should address this. 4) Also, if FN is forgiven, make sure it does not become an ordinary income. Happy to discuss.
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Reply by a lender
from University of Utah in Sandy, UT, USA
I would say that this is a difficult idea to structure. Most lenders are going to want to understand the cash flow metrics going in to the future. They do not want surprise payments that would supersede their rights as the 1st lien holder and would want you to place and additional payments to their loan. You can consider refinancing the note after 24 months to pay them faster but banks aren't going to agree to this structure. Happy to discuss further. redacted or###-###-####
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