Seller Notes Explained: Terms, Interest Rates & Standby Agreements
A seller note is a loan from the seller to the buyer for part of the purchase price. It's a promissory note signed at closing: the buyer owes the seller a set amount, at a set rate, on a set schedule.
Typical Seller Note Terms
- Size: commonly 5%–30% of the purchase price
- Rate: often 6%–10%, fixed
- Term: 3–10 years, sometimes with a balloon payment
- Payments: monthly, interest-only, or deferred (standby)
Standby and Subordination
When a bank or SBA lender is involved, the seller signs a subordination agreement: the lender gets paid first and has first claim on collateral. A standby agreement goes further and pauses payments to the seller for a set period — or, if the note counts toward an SBA down payment, for the full SBA loan term. Read more in SBA loans with seller financing.
What to Negotiate
- Interest rate and amortization — a longer schedule lowers the payment
- Prepayment — buyers want the right to pay early without penalty
- Collateral and guarantee — what the seller can take back if payments stop
- Offset rights — whether the buyer can reduce payments if the seller breaks a promise in the purchase agreement
- Default and cure periods — how much time to fix a missed payment
Seller Note vs. Earn-Out
A seller note is a fixed debt. An earn-out is a future payment that depends on the business hitting targets. Earn-outs are generally restricted in SBA-financed deals, so seller notes are the more common tool.
Have an attorney draft the note and a CPA review the tax treatment. Ready to finance the rest? Start on our business acquisition loans page.
Figures reflect general SBA program guidelines and typical market practice. Requirements, rates, and timelines vary by lender and deal, and every loan is subject to underwriting and approval.
Related SBA guides: SBA 504 Loans Explained · SBA 7(a) vs 504 · SBA Working Capital Loans · SBA Loan Timeline · SBA Loan Denied? · Cash to Close & Fees · Rates & Prepayment · Underwriting & Guarantees
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