How Does Seller Financing Work When Selling a Business?

Seller Financing: What It Is and How It Affects Your Business Sale

When you sell your business, buyers may not always pay 100% of the purchase price in cash at closing. Many deals, particularly those involving SBA loans, include a component of seller financing, where you essentially act as the bank for a portion of the sale price. Understanding how seller financing works, when it’s appropriate, and how to protect yourself is essential knowledge for any business seller.

What Is Seller Financing?

Seller financing (also called a seller note or seller carryback) is a loan from you to the buyer for a portion of the purchase price. Instead of receiving that amount at closing, you receive a promissory note from the buyer, who repays you over an agreed period (typically 3–7 years) with interest. For example, on a $1 million sale: buyer pays $800,000 at close and gives you a $200,000 note at 6% interest, payable over 5 years.

Why Sellers Agree to Carry a Note

Seller financing is common for several reasons. First, many buyers use SBA 7(a) loans to finance business acquisitions, and SBA lenders often require or prefer seller notes as a sign of seller confidence in the business. Second, seller financing can be a tax advantage, it allows you to report the gain from the seller note portion over multiple years using the installment sale method, potentially keeping you in a lower capital gains bracket each year. Third, carrying a note can help close deals that might otherwise fall apart due to financing gaps, and may allow you to achieve a higher total sale price.

The Risk: You’re an Unsecured Creditor

The primary risk of seller financing is that the buyer may default on the note, particularly if the business underperforms after the sale. As the note holder, you become a creditor, and in the event of business failure, you’ll likely be behind the SBA lender in priority. To protect yourself: require a personal guarantee from the buyer (and their spouse, if married), secure the note against business assets with a UCC lien, and consider a deed of trust if real estate is involved. Include clear default provisions and remedies in the promissory note.

Typical Seller Note Terms

• Amount: 10%–30% of purchase price is most common
• Interest rate: Typically Prime + 1% to 3%, or a fixed rate around 5%–8%
• Term: 3 to 7 years, often with a balloon payment
• Standby provisions: SBA lenders often require seller notes to be “on standby” for 24 months, meaning you cannot receive payments during that period (the interest accrues)

SBA Loans and Seller Notes

Most SBA 7(a) loans used for business acquisitions allow, and sometimes require, a seller note component. SBA guidelines typically allow seller notes of up to 5% of the purchase price to count toward the buyer’s equity injection. Seller notes that are on full standby can sometimes count as equity in the deal structure. Work with an SBA lender experienced in Florida business acquisitions to understand how the note interacts with the loan structure.

Negotiate Your Note Carefully

Every term of the seller note, amount, rate, term, security, standby period, default provisions, is negotiable. Ryan C. Winter helps St. Augustine business owners structure seller notes that are fair, properly secured, and appropriately priced for the risk you’re taking. Contact us before agreeing to carry any seller financing.

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Related Reading

• Should I Use a Business Broker to Sell My Business in St. Augustine?
• Should I Use a Business Broker to Sell My St. Augustine Business?
• How to Increase the Value of Your Business Before You Sell

• Category: SBA Financing, Selling a Business