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 a lender
from University of North Carolina at Wilmington in Argyle, WI 53504, USA
The Lender typically won't want preferential payments to the Seller, especially with them being subordinate (or on full standby where the Note is considered equity in the deal). We commonly see downward adjustments on Seller Notes where performance hurdles are NOT met.
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Reply by a professional
from New York University in New York, NY, USA
In addition to this being a challenge to draft in a direct way, this would create ordinary income and therefore be an atrocious idea... unless you created an incredibly complicated mechanism to accomplish this. Just have a clawback.
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