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Small Business and SBA Lending Blog
Last updated on Feb 19, 2023
2 min read

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 SB

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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.

Related Questions

What is a seller note in relation to an SBA 7(a) loan?

A seller note is a loan from the seller of a business to the buyer, which can be used to finance up to 5% of the purchase price of a business. Seller notes must typically be put on full standby for the entire duration of the loan, meaning that the borrower will not have to pay that portion of the loan back until the loan's maturity. In some cases, where a lender does not want to offer 90% financing, the lender may decide to finance a second seller note, which the borrower will begin paying off immediately after closing.

Sources:

  • Seller Notes in Relation to SBA 7(a) Loans
  • Can You Use An SBA Loan To Buy Part Of A Business?

What are the benefits of using a seller note in an SBA 7(a) loan?

Using a seller note in an SBA 7(a) loan can help bridge the gap between the amount of financing a lender is willing to provide and the total purchase price of a business. 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 up to 5%. This means that borrowers can purchase a business with as little as 5% down. Seller notes must typically be put on full standby for the entire duration of the loan, meaning that the borrower will not have to pay that portion of the loan back until the loan's maturity. 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, the lender could finance a second seller note of $50,000 that would involve the borrower making payments from the beginning of the loan.

What are the risks associated with seller notes in SBA 7(a) loans?

Seller notes in SBA 7(a) loans can be a great way to bridge the gap between the amount of financing a lender is willing to provide and the total purchase price of a business. However, there are some risks associated with seller notes. For example, if the borrower defaults on the loan, the seller may not be able to collect the full amount of the note. Additionally, the seller may not be able to collect the note if the borrower declares bankruptcy. Finally, the seller may not be able to collect the note if the borrower is unable to make the payments due to financial hardship.

For more information on seller notes in SBA 7(a) loans, please visit https://www.sba7a.loans/sba-7a-loans-small-business-blog/seller-notes and https://www.sba7a.loans/sba-7a-loans-small-business-blog/buying-part-of-a-business.

What are the requirements for a seller note in an SBA 7(a) loan?

The SBA 7(a) loan requires a seller note to 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, 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.

The SBA 7(a) loan requires the borrower to contribute 5% equity at closing. Of that 5%, the other 5% can be derived from the seller note. So, by combining a seller note with an SBA 7(a) loan, buyers can now achieve up to 95% of the financing they need to purchase a business.

What are the alternatives to seller notes in SBA 7(a) loans?

Seller notes are not the only way to finance a business acquisition with an SBA 7(a) loan. Borrowers can also use a combination of cash, seller financing, and other forms of financing to bridge the gap between the SBA loan and the purchase price of the business. For example, if a borrower is looking to purchase a business for $500,000 and the SBA will only finance $400,000, the borrower can use $50,000 of their own cash, $25,000 of seller financing, and $25,000 of other financing to bridge the gap.

In addition to seller notes, other forms of financing that can be used to bridge the gap between the SBA loan and the purchase price of the business include:

  • Personal loans
  • Home equity loans
  • 401(k) loans
  • Credit cards
  • Friends and family loans

It is important to note that the SBA does not allow borrowers to use any of these forms of financing to cover the 5% equity requirement. Borrowers must still contribute 5% equity at closing.

Tags
  • SBA 7(a) Loans
  • SBA Loans
  • SBA 7(a)
  • SBA Business Loans
  • SBA Seller Note
  • SBA 7(a) Seller Note

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