What is seller financing, and how does it work?

Key takeaways

Seller financing formulas

If the seller note is on full standby, its payments are deferred and lenders may exclude it from debt service during the standby period.

Worked example (illustrative numbers)

A buyer purchases a service business. All numbers are illustrative.

• Purchase price $1,000,000; buyer down payment $100,000
• Seller note $100,000 at 7.00%, amortized over 10 years with a 5-year balloon
• Senior loan = $1,000,000 − $100,000 − $100,000 = $800,000 at 10.50% for 10 years
• Senior payment ≈ $10,795/month; seller payment ≈ $1,161/month
• Balloon at month 60 ≈ $58,637; seller interest through the balloon ≈ $28,302
• Blended debt service ≈ $143,471/year; with $250,000 cash flow, DSCR ≈ 1.74x

Illustrative only. Real terms depend on the lender, the SBA and your file.

How seller financing works step by step

A typical path:

• Agree on price and how much the seller will carry in the letter of intent
• The senior lender reviews the deal and sets conditions for the seller note
• Attorneys draft the promissory note, security agreement and any subordination or standby agreement
• At closing, the seller receives cash from the down payment and senior loan, and holds the note for the rest
• The buyer pays the note on the agreed schedule, after any standby period

Seller notes, standby, balloons and interest

Seller note: a promissory note from buyer to seller, often 5% to 20% of the price, usually subordinated to the bank or SBA lender.

Standby: a period when the buyer makes no payments (full standby) or interest-only payments. SBA rules may require a seller note to be on full standby for a set time, or for the life of the SBA loan, if it counts toward the buyer's equity injection.

Balloon: the note amortizes as if it ran longer but the remaining balance comes due early. Plan the payoff source.

Interest: negotiated between buyer and seller. Very low rates can have tax effects; ask your tax advisor.

How a seller note combines with an SBA 7(a) acquisition loan

In many small business acquisitions, the SBA 7(a) loan covers most of the price, the buyer injects cash, and a seller note covers the rest. The SBA lender reviews the seller note terms, and under SBA SOP 50 10 a note on full standby may count toward part of the required equity injection. Partial changes of ownership and seller-note rules have been revised several times.

Always confirm current SBA requirements with a lender before you finalize the note terms.

Pros and cons for the buyer

• Pro: less cash at closing and a smaller bank loan
• Pro: the seller stays invested in a smooth transition
• Con: another payment to cover once standby ends
• Con: a balloon can force a refinance at a bad time

Pros and cons for the seller

• Pro: can attract more buyers and support a higher price
• Pro: earns interest and may spread taxable gain (ask a tax advisor)
• Con: payment risk if the business struggles after closing
• Con: usually subordinated to the bank and may be on standby for years

Red flags

Slow down if you see:

• A seller unwilling to carry any note on a deal that needs one
• Note terms that conflict with what the senior lender will allow
• A balloon with no realistic payoff plan
• Earn-out or note payments tied to numbers the buyer cannot verify
• No written subordination or standby agreement

SBA program context (checked against sba.gov on November 2, 2026)

• How these limits apply to a hospital purchase: the 7(a) cap usually covers goodwill, equipment and working capital, while a 504 loan is often paired with the building when boarding or kennel space is owned.
• SBA 7(a) maximum loan amount: the SBA lists $5 million.
• SBA 7(a) maturity: generally up to 10 years for business acquisitions, equipment and working capital, and up to 25 years for real estate.
• SBA 504 maximum (CDC portion): the SBA lists $5.5 million, for owner-occupied real estate and long-life equipment.
• SBA Express maximum: the SBA lists $500,000 with up to a 50% guarantee.
• Equity injection and seller-note standby rules for changes of ownership are set in SBA SOP 50 10 and have changed more than once. Confirm current requirements with a lender.
• If the buyer is purchasing the clinic real estate alongside the practice, ask the lender whether one blended term or separate notes for the building and the business fits better.
• Interest rate caps and guarantee fees change; we do not state them here. See sba.gov.

Rates, caps and fees change. Check the official source before you rely on any figure: SBA.gov: 7(a) loans.

• SBA SOP 50 10: Lender and Development Company Loan Programs
• SBA.gov: 504 loans
• SBA.gov: Terms, conditions and eligibility

Common questions