In seller financing, the seller of a business lets the buyer pay part of the purchase price over time. The deferred part is documented in a promissory note, the seller note. It is one of the most common tools in small-business sales, especially when the buyer is using a bank or SBA loan for most of the price.
Why sellers agree to it
- More buyers can afford the business. A note reduces the cash a buyer needs at closing.
- It supports the price. A seller willing to be paid over time is signalling confidence in the business. That can close a gap between the asking price and what a lender will finance.
- It can help the transition. A seller still owed money has a reason to help the new owner keep customers and staff.
Where the note sits
The buyer's senior lender is paid first. The seller note is subordinated, meaning it sits behind the bank loan in priority and is often unsecured or secured by a second lien. If the business struggles, the bank is repaid before the seller.
When the buyer uses an SBA 7(a) loan, the SBA's rules can add standby requirements, which limit or pause payments on the seller note for a period. A note on full standby may count toward the buyer's required equity injection. These rules change from time to time, so the SBA lender confirms what applies to each deal.
Terms to negotiate
- Amount. Commonly a minority of the price; the senior lender will have a view on how much is acceptable.
- Interest rate and term. Usually a fixed rate, over a shorter term than the bank loan.
- Standby period. Whether, and for how long, payments are deferred.
- Security and guarantees. Whether the note is secured by business assets behind the bank, and whether the buyer personally guarantees it.
- What happens if results fall short. Some deals tie part of the price to performance through an earnout instead of, or alongside, a fixed note.
Each side should get its own legal and tax advice. How the note and the sale are structured affects taxes for both buyer and seller.
How lenders view it
Lenders generally like to see some seller financing in an acquisition. It shows the seller believes the business will keep performing, and it lowers the amount the bank has to lend. What they look for is that the note's payments still leave enough cash flow to cover the senior loan comfortably. In other words, the debt service coverage test has to pass with both payments included, unless the note is on standby.
Selling? See your options on the sell a business page and value your business. Buying? Estimate your buying power with and without a seller note.