Key Insight
Seller financing is the seller saying: I believe in this business enough to stay invested in it. That signal matters — and buyers should notice when a seller refuses to offer it.
What Seller Financing Is
A seller note (or seller carry) is a loan from the seller to the buyer, structured as part of the acquisition. Instead of receiving 100% of the purchase price at closing, the seller receives a portion at closing and the remainder over time, with interest.
A typical seller note structure:
- Amount: 5-15% of the total purchase price
- Term: 3-7 years
- Interest rate: 5-8%, often below market given the seller's senior knowledge of the asset
- Subordination: The seller note is subordinated (junior) to any bank or SBA financing
Why Buyers Want Seller Financing
Reduces upfront capital requirement — The buyer pays less at closing. Combined with SBA financing, seller notes make deals accessible that wouldn't otherwise be.
Aligns seller incentives — A seller with a note outstanding has a financial reason to ensure a smooth transition. They'll answer the phone when the buyer calls at 10pm.
Signal of seller confidence — A seller who refuses any seller financing on a business they claim is exceptional is telling you something. Either they don't actually believe their own projections, or they've been burned before.
Bridges valuation gaps — When buyer and seller disagree on price, a seller note makes the gap less urgent — the seller gets full value if the business performs.
How Seller Notes Interact with SBA Loans
SBA rules govern how seller notes interact with SBA 7(a) financing:
- Seller notes on full standby (no payments for two years) can count toward the buyer's equity injection
- Seller notes not on standby do not count toward equity injection and must be factored into debt service coverage calculations
- Most SBA lenders cap combined seller note + SBA loan at 90% of the total project cost
The standby structure is negotiable — sellers may push back on receiving no interest or principal for two years. The tradeoff: counting toward injection makes the deal financeable at the buyer's equity level.
A $1.4M acquisition is financed with: $140K buyer equity (10%), $1.12M SBA 7(a) loan (80%), and a $140K seller note on full standby for two years (10%). The seller receives $1.26M at closing and $140K over the subsequent 5 years at 6% interest. The seller note enables the deal — without it, the buyer would need $280K in equity instead of $140K.
When Sellers Should Demand Full Cash
Sellers with leverage — strong financials, multiple buyers, a business that easily qualifies for SBA financing — may not need to offer seller financing at all. SBA-fundable businesses at or above $2M in SDE routinely close all-cash (via SBA). Sellers should treat a buyer's insistence on seller financing as a signal that the deal may not be SBA-approvable on its own merits.
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