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 actually encourages (and sometimes requires) a seller note as part of the financing stack.

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. The buyer must contribute at least 10% equity. 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. SBA loans are fully collateralized - all business assets are pledged, and the buyer and any 20%+ equity owner must provide a personal guarantee.

The SBA encourages but does not universally require seller financing. However, many SBA lenders require a seller note as a condition of their loan approval because it serves as a signal that the seller is confident in the business - a seller who insists on all cash is perceived as less confident. The SBA has standby provisions that regulate seller notes in SBA-financed deals: the seller note must typically be on standby for the first two years of the loan (interest-only, with no principal payments) and must be fully subordinated to the SBA loan. Sellers who want active repayment of their note during the first two years may face complications in SBA-financed transactions.

In an SBA-financed acquisition, the seller note sits behind the SBA loan in the capital structure. The seller must typically sign a subordination agreement acknowledging that: the seller note is junior to the SBA loan, principal payments on the seller note may be restricted during the standby period, the seller note cannot be accelerated while the SBA loan is outstanding without SBA lender consent, and the seller cannot take collateral that competes with the SBA lender's security interest. From a seller's perspective, this means: the seller note in an SBA deal is fundamentally less secure than a seller note in a non-SBA transaction, and the seller should 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.