Seller financing (when buying a business)
When you buy a business, the seller lets you pay part of the price later, under a promissory note (a seller note). It can bridge the gap between your cash, a bank loan and the price, and it keeps the seller invested in the handover.
- Secured on assets
- Personal guarantee likely
How it works
Instead of receiving the whole price at closing, the seller accepts part of it as a loan to you, repaid in installments with interest over an agreed period. Everything is negotiable: the amount, the rate, the term, any security, and what happens if the business does badly. A seller who is still owed money has a reason to help the business through the change of owner.
With an SBA 7(a) loan: a seller note can sit alongside an SBA loan for buying a business, but the SBA's rulebook (SOP 50 10 8.1, in force from October 1, 2026) sets limits:
- You must normally put in at least 10% of the project cost when buying a business. Seller debt can count toward that only if it is on full standby: no payments of principal or interest for the whole term of the SBA loan. Interest can build up and be paid after the SBA loan is repaid.
- Seller notes on full standby and similar limited sources can make up no more than half of the 10% you put in.
- The seller must rank behind the SBA lender for any security and cannot take action against you without the lender's agreement.
- If the price is above the business's appraised value, the difference must be covered by equity or by seller debt on full standby.
- A seller note can be refinanced only after it has been in place and paid on time for 36 months.
Tax for the seller: a sale paid in installments over more than one tax year is an installment sale. The seller can usually report the gain as payments arrive, but the price must be split between the business's assets, and inventory does not qualify. If the note charges less than the IRS test rate, part of the principal is treated as interest. This affects how much the seller asks for and the rate.
Upsides and downsides
Upsides
- Covers part of the price without a second bank loan
- Terms can be negotiated directly with the seller
- Keeps the seller invested in the business doing well after the sale
Downsides
- Not every seller can or will wait to be paid
- SBA rules can stop payments on the note for the whole term of the SBA loan
- The seller may want security, a guarantee, or a say if payments are missed
Risks
- If the business struggles, you still owe the seller as well as the bank
- Disputes with the seller over the business's condition can turn into disputes over the note
- A personal guarantee or a lien on the business's assets puts them at risk if you default
What it costs
- How it is priced
- Interest agreed with the seller, set out in the promissory note
- Costs that are easy to miss
- Sellers may ask a higher price in return for letting you pay later
- Legal costs for the note, security and any subordination agreement
- Interest building up on a standby note, payable after the SBA loan
Whatever part of the price the seller agrees to defer. With an SBA loan, standby seller debt can make up no more than half of the 10% equity you put in.
Does it fit?
Could fit when
- You are buying a business and need to cover part of the price
Unlikely to fit when
- You are not buying a business
- The seller needs the whole price at closing
Who can use it
- Business types: Sole proprietorship, Partnership, LLC, S corporation, C corporation, Benefit corporation, Cooperative
- The seller must be willing to wait for part of the price
- Lenders, including SBA lenders, set conditions on seller notes alongside their loans
Am I ready?
What a provider is likely to ask for. Tick what you have. Your ticks stay in this browser and nothing is stored. Checklist for all supplier and buyer-led finance
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- Business valuation
- Draft note terms
- Lender conditions
Regulation and protections
Regulators: No regulator for the finance itself.
Who runs it: Private providers, nationwide.
A private loan between buyer and seller, governed by the note and state law. When an SBA loan is involved, SBA rules decide whether the seller note can be paid and whether it counts toward your equity.
Types of provider: The seller of the business.
Also consider
What has changed
No changes since this page was published. It was last checked against its sources on October 17, 2026.
Sources
- SBA: SOP 50 10 8.1, Lender and Development Company Loan Programs (effective October 1, 2026): change of ownership, equity injection and standby debt · checked October 17, 2026
- IRS Publication 537 (2025): Installment Sales · checked October 17, 2026
Something wrong or out of date?
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