Using seller debt as 5% equity under SBA

searcher profile

August 22, 2019

by a searcher in Jackson, MS, USA

My understanding is that the SBA allows you to use seller financing as 5% equity (i.e., cuts your normal 10% equity requirement in half) if the seller goes on 10-year standby for that portion. Could anyone who has successfully used this provision share how they structured this? Interest accrues for 10 years and then a lump-sum payment at the end of year 10? Amortization starting at the end of 10 years? Curious to hear how you thought about it and what structures worked for your sellers.

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commentor profile
Reply by a lender
from Sam Houston State University in 5324 Community Dr, Houston, TX 77005, USA
Rina, we can use seller debt on full stand by (no payments of principal or interest during the term of the loan) as equity. As to the structure during the term of the SBA loan that is up to you to negotiate. I have had notes that do not accrue interest but most do during the stand by period. Additionally, we can do 2 seller notes and allow one full payments if the equity requirement has been met and the cash flow supports it. As an example, I recently closed a loan with 5% from the borrower, 5% on full stand by, and another seller note for 10% that payments were allowed on. We can get creative as long as we have a minimum of 10% equity form you and the seller on full stand by. Feel free to call me. I'm always happy to discuss the SBA program and it's many benefits for small business borrowers###-###-#### redacted
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Reply by a searcher
from Emory University in Atlanta, GA, USA
My understanding is that it depends on the bank and the deal (cashflow). We recently signed an LOI where the sellers agreed to a 5% note on full standby (10 years, acting as equity) and a 15% seller note to be paid in 5 years. Unfortunately the sellers had second thoughts and backed out after we had completed all due diligence and secured our loan. It can work, but make sure to confirm the seller's understanding of the risk upfront to avoid broken deal costs.
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