Seller financing appears in a large share of small business sales, and for good reason: it bridges valuation gaps, signals the seller's confidence in the business, and often makes bank financing possible at all.
It is also where under-documented deals create the longest-running disputes. A seller note is a real loan, and it needs a real loan's paperwork.
Why seller notes exist
Buyers rarely have the full purchase price in cash, banks rarely finance 100 percent, and sellers want top-line price. A seller note squares the triangle: the seller carries part of the price as a loan, collecting interest and often achieving a higher headline price in exchange for deferred payment and real repayment risk.
For buyers, the note also keeps the seller economically invested in a smooth transition, which is why many buyers prefer some seller paper even when they could pay cash.
Typical terms
| Term | Common range | Notes |
|---|---|---|
| Note size | 10% to 30% of price | Larger in riskier or harder-to-finance deals |
| Interest rate | 6% to 10% | Generally at or above bank rates to reflect subordination |
| Term length | 3 to 7 years | Often with amortization after any standby period |
| Security | Subordinated lien or unsecured | Almost always behind the bank |
The SBA standby wrinkle
When a seller note is counted toward the buyer's required equity injection in an SBA 7(a) deal, SBA rules generally require it to sit on standby, no payments of principal, and under current practice typically interest as well, for a defined period. Sellers should understand this before agreeing to structure: a note on full standby is patient capital, not near-term income.
Notes not counted toward equity injection have more flexible terms but still sit subordinate to the bank, documented through a subordination or standby agreement the lender drafts.
The paper trail
- Promissory note with rate, schedule, maturity, and default terms
- Security agreement and UCC filing, where the note is secured
- Subordination or standby agreement with the senior lender
- Personal guarantee, where negotiated
- Right of offset language coordinated with indemnification claims
- Amortization schedule both sides have signed off on
Next steps
FAQ
Is seller financing risky for the seller?
It carries real repayment risk: the note is usually subordinate to the bank and depends on the business performing under new ownership. Sellers should diligence their buyer the way a lender would.
What happens to a seller note if the business fails?
The senior lender is paid first from any recovery, and subordinated seller notes are often impaired or wiped out, which is precisely why they command higher interest rates.
Can a seller note be forgiven or renegotiated later?
Yes, by agreement, and it happens: notes are sometimes restructured when the business hits turbulence. Clean documentation makes those renegotiations far less contentious.