Seller Financing: When to Offer It and How to Protect Yourself

Why it produces a higher price

A buyer with $80,000 in cash and an SBA loan can buy a $1.2 million business if the seller carries $150,000 on standby. Without the note, that buyer is out, and the pool shrinks to buyers with more cash, who have more options and negotiate harder. Seller financing on 10 to 20 percent of the price is common and expands the market for the business.

Buyers also pay more for a business the seller is willing to finance, because the note signals confidence. Buyers read a refusal to carry any note as a lack of confidence.

The note carries interest, typically 6 to 10 percent depending on the market and the risk, which is a return on money the seller would otherwise have received at closing and invested elsewhere. Spreading the proceeds over several years can also spread the tax, since an installment sale lets the seller recognize gain as payments are received, although depreciation recapture is generally due in the year of sale regardless.

The risk

The buyer stops paying. The business fails, or the buyer runs it badly, or the buyer decides not to pay and dares the seller to do something about it. A seller note is unsecured debt behind the bank unless the seller negotiates otherwise, and if the bank forecloses, the seller is typically last in line.

The risk exists and it is manageable. Most seller notes get paid. The ones that do not are usually on businesses that were sold to buyers who should not have qualified, at prices the business could not support, with notes that had no protections.

How SBA loans affect the note

When the buyer uses an SBA 7(a) loan, the seller note is subordinate to the SBA loan, and the SBA sets rules on it. Under the current SBA standard operating procedure, effective June 2025, a seller note that counts toward the buyer's required equity injection must be on full standby for the entire term of the SBA loan, meaning no principal or interest payments during that period, usually ten years. A seller note that does not count toward equity can be on partial standby with payments beginning after a period the lender sets, often 24 months.

The buyer is required to inject at least 10 percent of total project cost, and a full-standby seller note can supply up to half of that. The practical result is that a seller asked to carry a note in an SBA deal should find out from the lender exactly what terms the lender will allow, because "full standby for ten years" is a very different note from "payments start in year three."

Structuring the note

Amount. Ten to twenty percent of the price is normal. More than 30 percent means the seller is the bank, and the seller should underwrite the buyer like one.

Term. Three to seven years is typical, shorter when possible. The longer the note, the more can go wrong.

Interest rate. Market for the risk. Below-market interest can create imputed interest issues with the IRS and leaves money on the table.

Security. A security interest in the business assets, subordinate to the bank if there is one, so that if the buyer defaults the seller has a claim on the equipment, inventory, and receivables. A UCC filing perfects it.

Personal guarantee. From the buyer personally, and from the buyer's spouse if the buyer is married and the state's community property rules make that relevant. A note guaranteed only by the buyer's new entity is guaranteed by nothing.

Default terms. What constitutes default, how long the cure period is, acceleration of the full balance on default, and the seller's right to take back the business or its assets. Include financial reporting so the seller sees the business's numbers quarterly and learns of trouble early.

Prepayment. Allow it without penalty. A buyer who refinances and pays off the note early has removed the seller's risk.

Cross-default. If the buyer defaults on the bank loan, the seller note is in default as well, which gives the seller the right to act before the bank has finished foreclosing.

Right of first refusal or consent on resale. If the buyer sells the business during the note term, the note is paid off at that closing.

What not to accept

A note with no security and no guarantee. A note whose payments depend on the business hitting targets, which is an earnout and is priced differently. A note that is subordinate to future debt the buyer may take on. A note with a balloon payment at the end that the buyer has no plan to fund. A note to a buyer who could not qualify for bank financing, unless the seller has done the underwriting a bank would have done and is comfortable with the answer.

A worked example

A $1.4 million services business. The buyer has $150,000 in cash and an SBA lender willing to lend $1.1 million. The gap is $150,000. The buyer asks the seller to carry it.

The lender's underwriting shows the buyer's cash covers the 10 percent injection, so the seller note does not need to count toward equity and does not need to be on full standby for the life of the loan. The lender requires 24 months of standby, after which the note can be paid over the remaining term.

The seller agrees to a $150,000 note at 8 percent interest, seven year term, no payments for 24 months with interest accruing, then monthly payments amortized over the remaining five years. The note is secured by a second lien on the business assets behind the SBA lender, personally guaranteed by the buyer and spouse, with quarterly financial reporting, a cross-default to the SBA loan, and a requirement that the note be paid in full if the business is sold.

The seller receives $1.25 million at closing and $150,000 plus about $55,000 in interest over the following seven years, assuming the buyer performs. The seller's net sheet shows the cash deal at a lower price the seller could have accepted from a different buyer, $1.3 million all cash, against this one, and the seller chooses the note because the buyer is strong, the protections are in place, and the total is higher.

The full standby case

If the buyer had $80,000 instead of $150,000, the lender would need the seller note to supply part of the equity injection. Under the rules in effect since June 2025, that portion of the note would have to be on full standby for the life of the SBA loan, ten years, with no principal or interest paid. The seller in that case is being asked to wait a decade for $70,000 of their price. Some sellers accept that for the right buyer and price. Most do not, and the right response is either a higher price to compensate for the delay, or a different buyer with more cash.

The distinction between a note that counts toward equity and one that does not is worth a direct conversation with the lender before the LOI is signed. The lender will say which it is.

Underwriting the buyer

A seller carrying a note is a lender and should behave like one. Personal financial statement, credit report, resume, references, and a conversation about how the buyer will run the business and where the money comes from if there is a soft year. A buyer who is offended by the request is telling the seller something.

We structure the note terms in the letter of intent so they are settled before the purchase agreement is drafted, and we present the seller with a net sheet showing proceeds under a cash deal and a seller-financed deal side by side, so the decision is made on the numbers and the risk rather than on the headline price alone.