Seller Note (Seller Financing)
A seller note is a loan the seller gives you for part of the purchase price. Instead of paying the full price in cash at close, you pay the seller back over time, with interest. It's one of the most common ways to bridge the gap between the asking price and what you can finance with a bank loan and a down payment.
Why it matters to a buyer
A seller note does two things. First, it cuts the cash you need at close, since the seller is effectively financing a slice of the deal. Second (and underrated), it keeps the seller with skin in the game: someone who carries a note has a real reason to want the business to keep running well after they leave. On SBA 7(a) deals, a seller note can even count toward your required equity injection if it's structured right.
Typical terms
- Size: commonly 5% to 20% of the purchase price.
- Rate: usually below the SBA rate, often around 6% to 8%.
- Term: typically 3 to 7 years.
- Standby: the SBA usually requires the note to be on full standby (no principal payments) for the first 24 months, so it doesn't compete with the bank loan.
Worked example
On a $1.5M deal, you put 10% down ($150K), the bank lends $1.2M, and the seller carries a $150K note at 6% over 5 years. That note runs roughly $34,800/year once payments start. Don't forget: that payment counts in your debt service, so it pulls your DSCR down. A note makes the deal more affordable at close, but the bank still wants the combined payments to pencil.