Seller financing, explained for the person on each side of it
A seller note is the most common way a deal that would not otherwise close, closes. It is also the term buyers understand least.
What is seller financing?
Seller financing is when the seller accepts part of the purchase price as a promissory note paid over time, instead of all cash at closing. A $600,000 business might be structured as $480,000 in cash at closing and a $120,000 seller note repaid over five years with interest. The seller becomes a lender to the buyer for that portion, and the note is documented and secured like any other loan.
Why would a seller agree to it?
Because it usually raises the price and widens the pool of buyers who can complete. Cash-only terms exclude most first-time buyers and shrink demand for the business. Sellers who carry a note typically get a higher headline price, a faster sale, and interest income on the balance. There can also be a tax benefit, because spreading the payments over years can spread the gain, though that depends on the structure and on advice specific to the seller.
Why do buyers want it?
Two reasons: less cash at closing, and a seller who is still invested in the handover. The first is obvious. The second matters more than buyers expect. A seller owed $120,000 over five years has a direct financial interest in the business surviving the transition, in answering the phone in month three, and in introducing you to the customers properly. A seller paid entirely in cash has none.
How does a seller note work with an SBA loan?
A seller note on full standby can count toward part of the buyer's required equity injection. Full standby means the seller receives no payments at all, principal or interest, until the SBA loan is repaid. Under that condition many lenders allow the note to satisfy some of the 10% injection, which is the single most effective way for a buyer to reduce the cash needed at closing. The exact treatment varies by lender, so confirm it with yours before writing it into an offer.
What terms should a seller note have?
The same terms any lender would insist on, written down properly. A handshake note is how these go wrong. What belongs in the document:
- The principal, the interest rate and the exact payment schedule
- Whether payments are on standby, and for how long, if an SBA loan is involved
- What security the seller holds, and where it ranks behind the bank
- What counts as default, and what the seller can do about it
- Whether the note can be prepaid, and at what cost
- A personal guarantee from the buyer, which most sellers should ask for
What is the risk to the seller?
The buyer runs the business badly and the note is not repaid. That risk is real, and it is why the seller should treat this like underwriting rather than a favour. Look at the buyer's experience, their cash reserve after closing, and how much of their own money is genuinely at risk. A buyer putting in very little of their own capital and asking the seller to carry a large note is asking the seller to take the risk while they take the upside.
How much of the price is normally seller-financed?
Commonly 10% to 25%, and rarely more than half. On SBA-financed deals the note is often sized precisely to bridge the equity injection gap. On unfinanced deals it can be larger, but a seller carrying most of the price has effectively sold nothing and lent everything, and should be paid for that risk in either the rate or the price.
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Common questions
What interest rate is normal on a seller note?
It varies with the market and with how much risk the seller is taking, but seller notes are commonly written near or somewhat below prevailing commercial rates. When the note is on SBA standby, no interest is actually received until the bank loan is repaid, so the rate matters less than the structure.
Can a seller take the business back if the buyer defaults?
Only if the note says so and the security supports it, and even then it is rarely straightforward, especially when a bank sits ahead of the seller in priority. This is why the security and default terms are worth an attorney rather than a template.
Does seller financing raise the sale price?
Usually yes. Sellers who offer it consistently reach a wider pool of buyers, and a buyer who does not have to fund the entire price in cash can pay more for the same business. The trade-off is that some of that price arrives over years rather than at closing.
Is an earnout the same as seller financing?
No. A seller note is a fixed debt repaid regardless of how the business performs. An earnout pays the seller only if agreed performance targets are met after closing, so the seller carries business risk rather than credit risk. Deals sometimes use both.