LOANOLOGY

SELLER FINANCING + BANK LOAN

Seller Financing in Small Business and Franchise Acquisition Loans


Seller financing involves you, the seller, providing a loan to the buyer for a portion of the purchase price, typically via a promissory note. This reduces the buyer’s upfront cash needs, making your business more attractive, while you receive most proceeds at closing and interest (e.g., 9%–10.5% for SBA loans) over time. Unlike bank loans, seller notes are flexible but subordinate to the primary lender’s note, ensuring the lender’s claim comes first.

Equity Injection Seller Standby Note vs. Standard Seller Note

  • Equity Injection Seller Standby Note (SBA 7(a) Loans): For SBA loans, buyers need a 10% equity injection (cash or assets). A standby note allows you to finance up to 5% of this injection, reducing the buyer’s cash requirement (e.g., from $100,000 to $50,000 for a $1M deal). It’s a 10-year note with no payments during the SBA loan term; at maturity, you receive the principal plus interest (e.g., 9%) in a lump sum. You hold a subordinated lien, secondary to the lender’s. This signals confidence in the business, boosting buyer approval odds.

  • Standard Seller Note: Used in SBA or conventional loans, this finances any portion of the purchase price (e.g., 10%–25%) beyond the equity injection. Payments (principal and interest) may occur monthly or be deferred, based on agreement. It’s also subordinated but offers flexibility in terms and timing. Common when valuation exceeds lender-approved amounts or cash flow is weak, it bridges financing gaps.

When Is Seller Financing Needed?

Most acquisition loans under $5 million don’t require seller financing, as banks prioritize loan-to-value (LTV, 75%–85%) and cash flow. However, specific scenarios may necessitate it:

  • SBA Equity Injection: If a buyer lacks sufficient cash or assets for the 10% SBA equity injection, you can finance 5% via a standby note, making your business accessible to qualified buyers.

  • Conventional Loan Requirements: Some conventional lenders mandate 10%–25% seller financing, though experienced lenders avoid this if LTV is met. LoanBox advises against such lenders, favoring those focused on LTV and cash flow.

  • Weak Buyer Profile: Buyers with limited cash flow, no established business, or a low-valued business relative to yours may require 10%–25% seller financing to mitigate lender risk.

  • Valuation Gaps: If the agreed purchase price exceeds the lender’s valuation (e.g., $1.2M price vs. $1M valuation), the buyer must cover the difference in cash (rare) or you can finance it with a standard seller note (common), ensuring the deal closes at your price.

  • Cash Flow Concerns: If the deal’s cash flow is marginal or the lender has concerns (e.g., high attrition risk), 10%–25% seller financing may be required to strengthen the loan.

Fixed vs. Adjustable Promissory Notes

Seller notes are formalized as promissory notes, either fixed or adjustable, each with distinct payment structures:

  • Fixed Promissory Notes: The owed amount remains constant, with predictable payments (e.g., monthly or deferred) at a set interest rate (9%–10.5%). Stable but inflexible if business performance changes.

  • Adjustable Promissory Notes: Payments adjust based on benchmarks like client or revenue retention. If attrition exceeds thresholds, the buyer can “claw back” part of the price, reducing your payout (SBA notes only decrease, not increase). Offers buyer protection but adds complexity.

Seller Subordination Requirements

In seller-financed deals, your note is subordinated to the primary lender’s (bank or SBA) note, meaning their claim on business assets takes priority in case of default. You retain a secondary lien, providing some security but lower priority. For SBA standby notes, subordination is strict, with no payments allowed during the loan term.

What is the SBA equity injection seller standby note?

If your buyer is utilizing an SBA loan to finance the purchase of your book or practice then the buyer’s down payment requirement depends on if it’s considered an expansion acquisition. In most all cases when an established independent advisor or firm is acquiring your business with an SBA loan they will not be required to make a down payment and you will not be required by the lender to seller finance a portion of the sale. However for book and practice acquisitions where the buyer is currently 100% W2 or has issues for whatever reasons with coming up with the full 10% cash for the required equity injection, there is an option for you as the seller to step in and help in a big way, all with minimal exposure to you.

Seller notes allow the seller to finance part of the equity injection, reducing the buyer’s upfront cash need.

Full Standby Note: Can cover up to 50% of the 10% injection (e.g., $50,000 for a $1 million project, with the remaining $50,000 from buyer/borrower sources like cash).

Terms: No principal or interest payments for the entire term of the 7(a) loan, which is a ten-year term. The note must be subordinated to the SBA loan with no acceleration clauses.

Get 95% cash and a 5% promissory note on a 10 year standby

If your buyer is utilizing an SBA loan to finance the purchase of your book or practice then the buyer’s down payment requirement depends on if it’s considered an expansion acquisition. In most all cases when an established independent advisor or firm is acquiring your business with an SBA loan they will not be required to make a down payment and you will not be required by the lender to seller finance a portion of the sale.

However for book and practice acquisitions where the buyer is currently 100% W2 or has issues for whatever reasons with coming up with the full 10% cash for the required equity injection, there is an option for you as the seller to step in and help in a big way, all with minimal exposure to you.

Seller notes allow the seller to finance part of the equity injection, reducing the buyer’s upfront cash need.

Full Standby Note: Can cover up to 50% of the 10% injection (e.g., $50,000 for a $1 million project, with the remaining $50,000 from buyer/borrower sources like cash).

Terms: No principal or interest payments for the entire term of the 7(a) loan, which is a ten-year term. The note must be subordinated to the SBA loan with no acceleration clauses.

Here’s how it works:

  • Upfront Cash: You could receive 95% of the purchase price (up to the SBA-approved valuation) in cash at closing, funded by the SBA loan and the buyer’s cash contribution.

  • Standby Note: The remaining 5% is a 10-year standby note from you to the buyer, with no principal or interest payments during the SBA loan term (typically 10 years). At maturity, the buyer pays the principal plus accrued interest (e.g., 9%, negotiable) in a lump sum.

  • Subordinated Lien: You hold a subordinated lien on the practice’s assets, behind the lender’s first lien, securing your claim if the buyer defaults (though secondary to the lender).

Example: You sell your practice for $1 million (SBA-approved valuation). The buyer needs a $100,000 equity injection (10% of project costs, including price, fees, and working capital). You provide a $50,000 standby note at 9% simple interest. At closing, you receive $950,000 in cash. In 10 years, you collect $95,000 ($50,000 principal + $45,000 interest).

Attrition offsets, hold-backs and clawbacks, as well as any additional seller financing without a standby period can be included in the payment structures.

Utilizing Escrow Agreements in Small Business and Franchise Acquisition Loans

When selling your small business or franchise, escrow agreements protect both you and the buyer by securing funds for specific obligations in SBA-backed acquisition loans. LoanBox simplifies this process, ensuring your sale closes smoothly with maximum proceeds.

Purpose of Escrow in Acquisitions
An escrow account securely holds a portion of the purchase price, safeguarding both parties by ensuring funds are available for contingencies outlined in the acquisition agreement. In 100% financed SBA 7(a) loans, escrow is often used for clawback provisions. You receive most of the purchase price at closing, wired from the lender, with 20%–50% set aside in escrow for clawbacks. Some lenders manage escrow internally; others require a third-party escrow firm. The escrow agreement between you and the buyer details fund distribution and calculation formulas. If retention conditions are met, you receive all proceeds; if attrition triggers a clawback, you get an adjusted amount, with the balance typically applied to the buyer’s loan.

How Escrow Is Used

  • Attrition Offset Clawbacks: Escrow manages client or revenue attrition by holding funds for a set period (e.g., 1–2 years). If attrition exceeds agreed thresholds, funds offset the impact; otherwise, you receive the full amount.

  • Seller Payment Distribution: For tax planning, you may prefer payments over 2–3 years. For a December closing, the down payment is funded at closing, with the balance in escrow disbursed annually (e.g., January 5th for 2–3 years).

  • Purchase Price Adjustments: Escrow covers adjustments based on financial accuracy, pending lawsuits, or regulatory compliance. Funds are released or retained per the agreement’s outcomes.

Tax Deferral Considerations

Seller-financed deals, including escrow, require careful planning to avoid tax liabilities, particularly constructive receipt, which negates deferral benefits. Key considerations:

  • Escrow Beyond Basics: Simply placing funds in escrow isn’t enough; you must have no control or access to them to avoid constructive receipt.

  • Alternative to Escrow: An attorney-client trust account can serve as escrow, reducing costs and complexity while meeting tax requirements.

  • Unambiguous Agreements: Escrow or trust terms must explicitly bar your access to funds. Vague terms risk immediate tax obligations.

  • Loan Risk and Sale Price: Seller financing doesn’t typically reduce the sale price; risk is offset by interest (e.g., 9%–10.5% for SBA loans), keeping price and interest distinct.

  • Interest Rates and Risk: A fair interest rate reflecting your risk is crucial, ensuring clarity and minimizing disputes.

Constructive Receipt


Avoiding constructive receipt is critical in seller-financed deals to maintain tax deferral. Depositing funds in escrow alone isn’t sufficient; you must have no access or control over them. Attorney-client trust accounts can act as cost-effective alternatives to formal escrow, but instructions must be clear to prevent access, avoiding immediate tax liabilities. Seller financing risk doesn’t lower the sale price; it’s compensated through interest (e.g., 9%–10.5%), ensuring price and interest are separate to minimize disputes.

LoanBox ensures your sale succeeds by matching buyers with lenders tailored to your business or franchise. Our pre-approval process helps buyers qualify early, reducing financing delays. With AI-driven tools and advisors, we navigate escrow and clawbacks, maximizing your proceeds. Think inside the LoanBox for a smarter sale.

SBA Guaranty Fees Impacting Buyers


Buyers face fees for SBA 7(a) loans (>12 months): 2% (≤$150K), 3% ($150,001–$700K), or 3.5%/3.75% ($700,001–$5M), often financed but increasing debt service. Multiple loans within 90 days are treated as one for fee calculations, affecting buyer financing and your sale terms.

Escrow Process

  • Establishing the Escrow Account: You, the buyer, and an escrow agent (e.g., a third-party firm or financial institution) sign an agreement outlining funding, duration, and distribution terms.

  • Funding the Escrow: At closing, the lender transfers the agreed escrow amount (20%–50%) to the account, held until conditions are met.

  • Distribution of Funds: Funds are released per the agreement. If conditions are satisfied, you receive the full amount; if a clawback is triggered, you get the adjusted sum, with the remainder often applied to the buyer’s loan or returned to them.

LoanBox Loanology provides independent insights into small business lending based on what we know can be accomplished with most LoanBox lenders. However, there may be some policy, perspective, or viewpoint we share which may not reflect those of all lenders on our platform, as each brings unique policies. LoanBox lenders brings diverse policies and perspectives so not all lenders will be able to assist or even agree with all of the tips, strategies, articles, guides, and insights we provide for small business owner borrowers. Lenders are not responsible, liable or obligated for the content or advice provided in Loanology or on LoanBox.com. For specific guidance, use the search bar or just contact us directly and speak to a LoanBox Advisor.