Key Insight
The term sheet says "seller note at 6%, 5 years." The promissory note determines what actually happens if a payment is missed, if the business is sold, or if the buyer disputes the amount owed.
Key Promissory Note Terms
Principal: The original loan amount Interest rate: Fixed or variable, and how computed (simple vs. compound) Payment schedule: Monthly, quarterly, or balloon structure Maturity date: When the full balance is due Prepayment: Whether the borrower can pay early without penalty Default provisions: What constitutes a default (missed payments, material breach), the cure period, and the remedies upon default Acceleration clause: Whether the full balance becomes immediately due upon default Subordination: Whether the note is subordinate to senior lenders (typically yes for seller notes)
Seller Note Specific Terms
Seller notes typically include:
- Standby provisions: Whether payments are deferred during the standby period (SBA requirement)
- Cross-default: Whether a default on the SBA loan also triggers default on the seller note
- Change-of-control: Whether a subsequent sale of the business triggers full repayment
- Offset rights: Whether the buyer can withhold payments against indemnification claims
Seller Note Subordination Agreement
When there is both an SBA loan and a seller note, the SBA lender will require a formal subordination agreement — the seller formally agrees that the seller note is junior to the SBA loan in priority. Payments on the seller note during the standby period are blocked; repayment on default is also junior to the SBA lender.
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