LOANOLOGY

BUYER’S LOAN IMPACTS ON PAYMENT STRUCTURES

Selling your business—whether a single location, multi-unit operation, or rural enterprise? The type of loan your buyer secures, like an SBA or conventional loan, shapes how you get paid. The SBA’s SOP 50 10 8, effective June 1, 2025, sets strict rules for acquisition financing, affecting payment structures and deal terms. Let’s explore how buyer financing impacts you as a seller, with LoanBox’s expertise ensuring a smooth transaction.

Why Seller Impacts Matter

The buyer’s loan type shapes your payout, like a $1 million lump sum at closing or a seller note with delayed payments, impacting your liquidity and risk. For example, an SBA loan may ensure a sale but limit you to upfront cash, while a conventional loan allows an earn-out for a multi-unit deal. LoanBox’s expertise helps you navigate these impacts to secure a deal that works for you.

Selling to a Buyer Using an SBA Loan?

Seller Note Equity Injection for SBA Loans: A Seller’s Perspective

Selling your small business or franchise, such as a retail operation or international trade venture, through an SBA-backed change of ownership loan? As a seller, you can play a key role in facilitating the deal by offering a seller note as part of the buyer’s equity injection. Per the SBA SOP 50 10 8 (effective June 1, 2025), a seller note can cover a portion of the required 10% equity injection, providing you with a substantial upfront payment while creating a long-term financial benefit. LoanBox explains how this works from your perspective, highlighting why it’s a win-win for you, the buyer, and the lender.

What Is a Seller Note Equity Injection?

A seller note is a promissory note you, as the seller, provide to the buyer, financing a portion of the purchase price as part of their equity injection for an SBA 7(a) loan. This note acts as a credit to the buyer’s required 10% contribution of total project costs (e.g., purchase price, fees, working capital), reducing their upfront cash needs. From your perspective, it’s a structured way to receive most of the purchase price immediately while deferring a small portion with interest over time.

  • How It Works: You agree to finance up to 5% of the purchase price (up to the SBA-approved business valuation) through a 10-year standby note. This note is on full standby, meaning no principal or interest payments are made to you during the SBA loan term (typically 10 years). At the end of the term, the buyer pays the principal plus accrued interest (e.g., 7%) in a lump sum or as agreed.

  • Upfront Payment: You receive 95% of the purchase price (up to valuation) in cash at closing, funded by the SBA loan and the buyer’s cash contribution. The remaining 5% is covered by the standby note.

  • Subordinated Lien: You retain a subordinated lien on the business assets, behind the SBA lender’s first lien. This gives you a legal claim if the buyer defaults, though your claim is secondary to the lender’s.

  • Example: You sell your business for $1 million (SBA-approved valuation). The buyer needs a $100,000 equity injection (10% of project costs). You provide a $50,000 standby note (5% of the price) at 7% interest over 10 years. You receive $950,000 in cash at closing, and in 10 years, you collect $50,000 plus approximately $35,000 in interest (simple interest at 7%).

SBA Loan Payment Structures

Characteristics:

  • Loan Types: 7(a) (up to $5 million), Express (up to $500,000), or 504 (up to $5.5 million for real estate), common for acquisitions like a multi-unit service business.

  • Buyer Qualifications: SBSS 155+ for loans up to $500,000, FICO 650–680 for larger loans, DSCR 1.15+, and a 10%+ equity injection.

  • SBA Rules: Require full payment at closing or structured notes with fixed terms, limiting creative structures per SOP 50 10 8.

Allowed Structures:

  • Lump Sum at Closing: Buyer pays the full sale price upfront, like $1 million for a retail business, funded by the SBA loan.

  • Seller-Financed Note: Buyer pays part upfront (e.g., 80%) and the rest via a seller note (e.g., 20% over 5 years), but SBA requires full subordination, meaning the seller note is paid after the SBA loan, increasing risk.

Restricted Structures: Earn-outs (payments tied to future performance), phased equity sales (selling equity over time), or retained equity with active roles are generally prohibited, as SBA loans prioritize immediate transfer of ownership.

Collateral: SBA loans often require business assets and real estate (25%+ equity for 7(a) loans over $350,000); Express loans skip collateral for $50,000 or less. A HELOC can avoid a buyer’s home lien, affecting their ability to fund your deal.

Conventional Loan Payment Structures

Characteristics:

  • Loan Types: Term loans or lines of credit, typically requiring FICO 680+, DSCR 1.25–1.75, and higher revenue for a multi-unit acquisition.

  • Buyer Qualifications: Stronger credit and financials, with less reliance on government guarantees, ideal for established buyers.

Allowed Structures:

  • Lump Sum at Closing: Full payment upfront, like $1.5 million for a service business, similar to SBA loans.

  • Earn-Outs: Payments tied to future performance, like 20% of the sale price based on revenue over 3 years, common for retail acquisitions.

  • Phased Equity Sales: Selling equity in tranches (e.g., 25% annually over 4 years), allowing gradual exit for a multi-unit operation.

  • Retained Equity with Role: Seller retains equity (e.g., 10%) and stays involved, like managing a rural business post-sale.

Collateral: Often requires real estate or assets, with less flexibility than SBA Express or Microloans, impacting the buyer’s ability to fund complex structures.

How Buyer Loans Affect Payment Structures

The buyer’s loan type directly influences how you’re paid. Here’s how SBA and conventional loans impact your options:

Key Buyer Qualification Factors

Cash Flow (DSCR): Buyers need a business DSCR of 1.15+ (SBA) or 1.25–1.75 (conventional) and a personal DSCR of 1.1+ (SBA) or 30–40% DTI (conventional) to cover loan payments, verified with tax returns and projections for a service or retail acquisition.

Credit Scores: SBSS 155+ for SBA loans up to $500,000; FICO 650–680 for larger SBA loans; FICO 680+ for conventional loans. Lower scores may restrict loan types, limiting payment structures for a rural business sale.

Equity Injection: Buyers must provide 10%+ of the project cost (e.g., $100,000 for a $1 million loan), higher for startups or acquisitions (15–20%), affecting their ability to fund upfront payments for a multi-unit deal.

Experience and Plan: Buyers need a solid business plan and industry experience, especially for multi-unit or rural acquisitions, to prove repayment ability.

Why Pre-Qualification Matters

  • Many buyers, especially first-timers, aren’t pre-qualified, risking delays or failed deals if their financing doesn’t align with your terms, like an earn-out for a retail business.

  • Pre-qualified buyers streamline negotiations, ensuring the loan supports your goals, whether a lump sum or phased equity sale for a service operation.uire buyers with robust qualifications, which may limit your buyer pool.

Qualifying Your Buyer

A buyer’s ability to secure financing that aligns with your payment goals is critical. Here’s what to consider:

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.