Seller Financing vs. SBA Loan:
How Business Acquisitions Get Funded

An SBA 7(a) loan is a government-guaranteed bank loan - the buyer borrows from a bank, the Small Business Administration guarantees up to 85% of the loan (reducing the bank's risk), and the buyer repays the bank over the loan term. Seller financing (seller note) is when the seller accepts a promissory note from the buyer for a portion of the purchase price - the buyer repays the seller directly over time. In most lower middle-market acquisitions ($500K-$5M), these two structures are used together rather than as alternatives: SBA 7(a) covers 70-80% of the purchase price, seller note covers 10-20%, and the buyer contributes the remaining equity.

The SBA 7(a) maximum loan amount is $5 million. Terms for business acquisitions (as opposed to real estate) are typically 10 years. Interest rates are variable, tied to the Prime Rate or SOFR, with a maximum spread set by SBA regulations. As of 2026, rates are approximately 10-13% for most small business acquisitions. For an Initial Acquisition, SBA SOP 50 10 8.1 requires a 10 percent equity injection that cannot be reduced or eliminated. The SBA requires that the business has been operating for at least 2 years, that the acquisition makes economic sense (there is a business reason for the purchase beyond tax optimization), and that the buyer has relevant industry experience. Under SBA SOP 50 10 8.1, lenders must take a security interest in the accounts receivable and inventory of the operating entity. Under 13 CFR 120.160(a), holders of at least a 20 percent ownership interest generally must guarantee the loan.

Whether a seller note is part of an SBA-financed deal depends on the deal and the lender. If a seller note is used, SBA SOP 50 10 8.1 (effective October 1, 2026) addresses it in the equity injection rules. Under SOP 50 10 8.1, seller debt that is subordinated to the lender and on full standby (no payments of principal or interest for the term of the 7(a) loan) may be considered as equity for SBA's purposes. Seller debt that is not on full standby is counted differently: total debt eligible to support a change of ownership transaction, including seller debt that is not on full standby, is limited to the business valuation amount. A seller who expects payments on the note during the loan term should ask the lender early how the note will be treated.

When a seller note is on full standby under SBA SOP 50 10 8.1, the lender must use SBA Form 155 or its own equivalent Standby Agreement form, and a copy of the note must be attached. Under SOP 50 10 8.1, the standby creditor must subordinate any lien rights in collateral securing the loan to the lender's rights in the collateral and take no action against the borrower without lender consent. Standby debt may accrue interest, and that interest may be added to the standby debt and amortized after the 7(a) loan is paid in full. The provider of standby debt may not take an equity investment in the business. A seller should read the standby terms and evaluate the buyer's ability to service both debts before agreeing to the financing stack.

Seller financing alone (without an SBA loan) is viable when: the deal is structured as a true seller-financed transaction (seller acts as the bank, buyer pays seller over 5-10 years); the business is too small or too early-stage for an SBA loan; the buyer prefers speed over cost (SBA processes take 60-90 days; seller note can be documented in days); the seller is highly motivated and willing to assume the credit risk; or the parties are doing a management buyout where the management team needs financing flexibility. Pure seller financing gives the seller more control over the terms but more risk - the seller is effectively making a secured loan to the buyer to buy the seller's own business.