Seller financing means the seller lends you part of the purchase price. You pay the seller over time through a seller note, a loan agreement with an amount, interest rate, term, and payment schedule. In small-business deals, a seller note often sits next to a bank or SBA loan and covers part of the gap between your cash and the price.
Why seller financing matters to a buyer
- Less cash at closing. The note replaces part of the money you would otherwise borrow or put in.
- The seller shares the risk. A seller who is paid over time has a reason to tell the truth about the business and help with the transition.
- A signal. A seller who refuses any financing on a business they say is strong is telling you something. Ask why.
- A remedy. With a right of offset in the note, you can reduce payments if the seller breaks promises made in the purchase agreement.
Seller note terms to negotiate
| Term | What to decide |
|---|---|
| Amount | The part of the price the seller carries. |
| Interest rate | Fixed rate. Must be at or above the IRS applicable federal rate to avoid imputed interest. |
| Term and amortization | How many years, and whether there is a balloon payment at the end. |
| Standby | Whether payments are paused (required in some SBA structures). |
| Security | Usually a lien on business assets, behind the bank. |
| Right of offset | Your right to reduce payments if the seller breaches the agreement. |
Seller financing with an SBA loan
Seller notes and SBA 7(a) loans are often used together. Under current SBA rules (SOP 50 10 8), the buyer must inject at least 10% of the project cost. A seller note can count toward up to half of that injection, but only if it is on full standby: no principal or interest payments for the life of the SBA loan. A seller note that is not on standby can still be part of the deal, but it does not count as your equity, and the lender includes its payments when testing debt coverage.
Worked example: how a seller note changes coverage
A business with $205,900 of verified SDE sells for $650,000. After a $55,000 manager salary, $150,900 is available for debt. Loans are 10 years at an assumed 10.25% (SBA) and 5 years at 6% (seller note).
| Structure | Annual debt service | DSCR |
|---|---|---|
| 10% cash + 90% SBA ($585,000) | $93,744 | 1.61x |
| 10% cash + 10% seller note ($65,000) + 80% SBA ($520,000), years 1–5 | $98,408 | 1.53x |
| Same structure, years 6–10 (note paid off) | $83,328 | 1.81x |
The seller note costs $1,257 a month. Because it is shorter than the bank loan, it lowers coverage in the first five years (1.53x vs. 1.61x) and raises it after. The structure with a note puts $65,000 of the seller’s money at risk alongside yours.
Seller note vs. earnout
A seller note is a fixed debt: you owe it regardless of results. An earnout is a payment that depends on future performance, such as revenue in the first two years. Earnouts help when buyer and seller disagree on what the business will earn. They also cause disputes about how results are measured, so define the metric and the accounting precisely.
Risks for the buyer
- Total debt payments can exceed what the business earns in a bad year. Test coverage with all notes included.
- A balloon payment at the end of a short note needs a refinancing plan.
- Without a right of offset, you must keep paying even if the seller hid problems.
FAQ
How does seller financing work for a business?
You pay part of the price at closing and sign a note for the rest. You then make payments to the seller under the note’s terms, usually monthly.
Can I buy a business with seller financing and no money down?
Rarely, and not with an SBA loan, which requires a cash injection. See SBA loan to buy a business.