The Rise and Fall of Seller-Financed Notes in SBA Transactions

The rise and fall of seller-financed notes in SBA transactions is a story of innovation, flexibility, and, ultimately, regulatory tightening that has dramatically reshaped how small business acquisitions are financed in the United States. For years, seller notes were a creative way to bridge funding gaps, encourage seller participation, and make deals work for buyers who may not have had enough cash for a traditional down payment. However, recent changes in SBA Standard Operating Procedures (SOPs), specifically the move from SOP 50 10 7.1 to SOP 50 10 8, have fundamentally altered the landscape, making seller notes far less attractive and, in many cases, practically obsolete for SBA lending.

The Golden Era: Seller Notes as a Flexible Tool

Seller-financed notes, often simply called seller notes, have long been a staple in small business acquisitions. In these arrangements, the seller essentially acts as a lender, providing a loan to the buyer to cover a portion of the purchase price not financed by the SBA loan or the buyer’s cash injection. This approach helped bridge the gap between the amount a buyer could raise and the seller’s asking price, making deals possible that otherwise might have stalled.

Under SBA SOP 50 10 7.1, seller notes played a particularly powerful role. The SBA allowed these notes to count toward the buyer’s required equity injection-the upfront capital needed to secure SBA financing. This was a game changer, especially for buyers with limited liquidity or those seeking to minimize their cash outlay.

Two Paths: Full Standby and Partial Standby

The key to using seller notes as equity injection under SOP 50 10 7.1 lay in the concept of “standby.” There were two main options:

• Full Standby: The seller note was placed on full standby for at least two years. During this period, the buyer was not required to make any payments-principal or interest-to the seller. In this structure, the entire amount of the seller note could count as equity injection, enabling scenarios where buyers could achieve 100% financing: 90% from the SBA, 10% from a seller note, and no cash out of pocket.

• Partial Standby: Here, the seller note allowed for interest-only payments during the first two years. This structure was slightly less favorable, as only a portion (typically up to 2.5% of the purchase price) of the seller note could count toward the equity injection requirement, with the remainder requiring a cash contribution from the buyer.

This flexibility made seller notes highly attractive. Sellers were incentivized to participate because they could receive interest income after two years, and buyers could access SBA financing with minimal cash down. Lenders liked these deals because the seller’s willingness to finance a portion of the purchase price demonstrated confidence in the business and the buyer’s ability to succeed.

Why Seller Notes Worked: A Win-Win-Win

The structure under SOP 50 10 7.1 created a win-win-win scenario:

• Buyers could acquire businesses with as little as 5% cash down, or sometimes even less, depending on how the deal was structured. This opened the door for a broader pool of potential acquirers, including first-time buyers and those with less liquidity.

• Sellers could facilitate a sale, often at a higher price, and earn interest on their note after the standby period. Their willingness to “carry paper” also signaled confidence in the business’s future.

• Lenders saw reduced risk, as the seller’s involvement often meant a smoother transition and a more invested seller during the handover period.

This approach became especially popular during the years following the COVID-19 pandemic, as buyers and sellers looked for creative ways to get deals done in a challenging economic environment.

The Shift: SOP 50 10 8 and the End of an Era

Everything changed with the release of SBA SOP 50 10 8, which took effect in June 2025. The new rules dramatically tightened the requirements for using seller notes as equity injection in SBA transactions.

The New Rules: Full Standby for the Life of the Loan

Under SOP 50 10 8, the SBA now requires that any seller note used as equity injection must be on full standby for the entire life of the SBA loan-often a 10-year term. This means the seller cannot receive any principal or interest payments until the SBA loan is fully paid off. Additionally, the seller note can only account for up to 50% of the required equity injection. For example, if the SBA requires a 10% equity injection, only 5% can come from a seller note on full standby, with the remaining 5% needing to be a cash contribution from the buyer.

This is a stark contrast to the previous rules, where the standby period was only two years, and sellers could start receiving payments (at least interest) after that period.

Why This Change Matters

The shift to a full 10-year standby period is, for many sellers, a deal breaker. Few sellers are willing to wait a decade to receive payment-especially without interest-on a significant portion of their sale proceeds. The opportunity cost is simply too high, and the risk of not being paid at all (if the business fails) looms large.

As a result, the use of seller notes as a meaningful part of the equity injection in SBA deals has all but disappeared. Deals that previously relied on creative seller financing structures now require buyers to bring more cash to the table or seek alternative sources of equity.

Comparing the Old and New Rules

Let’s break down the main differences between SOP 50 10 7.1 and SOP 50 10 8 in a way that’s easy to understand:

Feature	SOP 50 10 7.1	SOP 50 10 8
Seller Note Standby Period	2 years (full or partial standby)	Full standby for entire loan term (10 yrs typical)
Payment Allowed During Standby	None (full standby); Interest only (partial)	None (no principal or interest)
% of Equity Injection Allowed	Up to 100% (full standby); 2.5% (partial)	Max 50% of required equity injection
Buyer Cash Required	As little as 0% (with full standby)	At least 5% (if 10% required, only 5% can be seller note)
Seller Note Attractiveness	High (shorter wait, interest possible)	Very low (long wait, no interest)

The Real-World Impact: Why Sellers Won’t Go for It

The practical effect of the new rules is that seller notes have become a “dead option” for most SBA lending scenarios. Here’s why:

• Time Value of Money: Waiting 10 years to receive payment, with no interest, is a non-starter for most sellers. They’d rather negotiate a lower sale price for cash at closing than accept a promise to be paid a decade later.

• Risk Exposure: Sellers are taking on significant risk by holding a note for 10 years, especially with no interim payments. If the business fails or the buyer defaults, the seller could lose out entirely.

• Deal Structure Complexity: The new rules add complexity and reduce flexibility, making it harder to get deals done-especially for buyers with limited cash.

As a result, most sellers simply refuse to hold a note under these terms, and buyers are forced to find other ways to meet the equity injection requirement. This has led to a return to more traditional deal structures, where buyers must bring more cash or seek outside investors.

The Broader Implications for SBA Lending

The tightening of seller note rules under SOP 50 10 8 reflects a broader shift in SBA policy toward more conservative underwriting and risk management. While this may protect the SBA and lenders from potential losses, it also reduces the pool of eligible buyers and makes it harder for sellers to exit their businesses.

For buyers, the new landscape means:

• Higher Cash Requirements: Buyers must be prepared to bring at least 5% (and often more) of the purchase price in cash. This may limit opportunities for first-time buyers or those with less liquidity.

• Fewer Creative Financing Options: The days of 100% financing through clever use of seller notes are over. Buyers will need to explore alternative sources of equity, such as partners, investors, or personal savings.

• More Scrutiny from Lenders: Lenders will be looking for stronger deals, with more “skin in the game” from buyers and less reliance on seller financing.

For sellers, the new rules mean:

• Less Flexibility in Structuring Deals: Sellers can no longer use notes to facilitate a sale to a buyer with limited cash. This may reduce the pool of potential buyers and could impact business valuations.

• Longer Wait for Payment (If Any): Sellers who do agree to hold a note under the new rules will face a long wait for payment, with no interim interest income.

Looking Ahead: Is There a Path Forward for Seller Notes?

While the new rules have made seller notes far less attractive in SBA transactions, they are not entirely gone. In some cases, seller notes may still be used outside of the equity injection calculation-such as to finance a portion of the purchase price above and beyond the SBA loan and required cash injection. However, these notes will not count toward the buyer’s equity injection and must be structured carefully to comply with SBA guidelines.

Some industry experts believe that, over time, the SBA may revisit these rules if they see a significant drop in small business acquisitions or if market conditions change. For now, however, the era of the seller note as a flexible, creative tool for SBA deals is largely over.

The rise and fall of seller-financed notes in SBA transactions is a classic example of how regulatory changes can reshape an entire industry. For years, seller notes provided a flexible, win-win solution for buyers, sellers, and lenders alike. But with the introduction of SOP 50 10 8, the SBA has effectively closed the door on this approach, requiring seller notes to be on full standby for the life of the loan and limiting their use as equity injection. The result is a more conservative, less flexible lending environment-one that favors buyers with more cash and sellers willing to accept less creative deal structures.

For those navigating the current SBA landscape, it’s essential to understand these changes and plan accordingly. Creative deal-making may still have a place, but it will require new strategies and a willingness to adapt to a more traditional, cash-driven approach to business acquisition financing.

---

Howard Law is a business, regulatory and M&A law firm in the greater Charlotte, North Carolina area, with additional services in M&A advisory and business brokerage. Howard Law is a law firm based in the greater Charlotte, North Carolina area focused on business law, corporate law, regulatory law, mergers & acquisitions, M&A advisor and business brokerage. Handling all business matters from incorporation to acquisition as well as a comprehensive understanding in assisting through mergers and acquisition. The choice of a lawyer is an important decision and should not be based solely on advertisements. The information on this website is for general and informational purposes only and should not be interpreted to indicate a certain result will occur in your specific legal situation. Information on this website is not legal advice and does not create an attorney-client relationship. You should consult an attorney for advice regarding your individual situation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.