Key Insight
A seller note on full standby counts as equity for SBA purposes — it converts a debt instrument into something the SBA treats like an equity contribution, which can dramatically reduce the buyer's required cash injection.
What Full Standby Means
A seller note on "full standby" means:
- No principal payments during the standby period (typically 24 months)
- No interest payments during the standby period
- The seller receives nothing on the note until the standby period ends
After the standby period, regular payments resume per the promissory note schedule.
Why Standby Matters for SBA Financing
The SBA requires the buyer to inject at least 10% of total project cost in equity. The SBA allows a seller note on full standby to count toward this equity requirement — because the seller is effectively saying "I'll wait to be paid" rather than immediately competing with the SBA lender for cash flow.
Without standby treatment: seller note reduces the buyer's loan-to-value ratio but doesn't count as equity. The buyer still needs 10% in cash.
With full standby: seller note can count toward the 10% equity requirement, reducing the buyer's cash needed at closing.
Seller Resistance
Sellers frequently push back on full standby because they're foregoing 2 years of payments on their note. Common negotiating points:
- The standby may be partial (principal only, not interest)
- The seller may accept standby in exchange for a higher note balance or interest rate
- In competitive deal situations, sellers may refuse standby entirely
Deal: $900K purchase price. Seller offers $90K note on full standby. SBA equity injection required: $90K (10% of $900K). With standby: the $90K seller note satisfies the equity injection. Buyer needs $0 in cash equity (all equity injection comes from the seller note). Without standby: buyer still needs $90K cash despite the seller note.
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