Seller Notes in Relation to SBA 7(a) Loans

A seller note is a loan given by the current owner of a business to a new buyer, often in order to bridge the gap between the amount of financing the buyer has and the purchasing price of the business. For example, if a business was being sold for $6 million, and the buyer only had $5 million in SBA 7(a) financing, the seller could provide a $1 million seller note in order to cover the difference.

How Do Seller Notes Work With SBA 7(a) Loans?

In the past, SBA 7(a) borrowers had to put 20% to 25% equity down if they wanted to purchase a new business, but with the SBA’s new acquisition guidelines, the SBA can fund up to 90% of a business acquisition, with a seller note being able to fund 5%. Borrowers must still contribute 5% equity at closing. SBA 7(a) seller notes must typically be put on full standby for the entire duration of the loan. This means that if an SBA 7(a) borrower takes out a 10-year, $500,000 loan to purchase a business and gets a seller note worth $25,000, they will not have to pay that portion of the loan back until the 10 years are up. The borrower will still receive the remaining $475,000 in cash at closing.

In some cases, where a lender does not want to offer 90% financing, the lender may decide to finance a second seller note. For example, if a lender only wanted to give a borrower 80% financing, or $400,000, to purchase the business in the example above, the lender could finance a second seller note of $50,000 that would involve the borrower making payments from the beginning of the loan. In this case, the seller would receive $425,000 cash at closing, and the borrower would be responsible for repaying two borrower notes; one $25,000 note due at loan maturity, and one $50,000 note that they’ll begin paying off immediately after closing.

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