A capital stack ranks the money that pays for a purchase by who is repaid first. In a small business purchase financed with an SBA loan, the lender's loan sits at the bottom, a seller note can sit above it, and the buyer's own cash sits on top. The SBA requires at least 10 percent of the total project cost from a buyer new to the business (SBA Standard Operating Procedure 50 10 8.1, Appendix 15).
The page describes federal SBA rules as general information; a particular loan turns on the lender's reading of its documents.
How the layers rank
Rank decides who is paid out of each month's cash while the business runs, and who collects first if it fails and its assets are sold.
The lender's claim comes first in both cases, and for a seller who lends alongside an SBA loan the standby creditor's agreement puts it there. On the SBA's Form 155 the seller agrees to sign whatever the lender needs to put the seller's security interest behind the lender's loan, to take no action against the collateral without the lender's written consent, and to turn over, within 15 days, any payment received in breach of the agreement (SBA Form 155, Standby Creditor's Agreement). The form's first item offers four choices, running from no payments at all, through interest only, to regular payments of principal and interest.
A seller note is paid after the lender and before the buyer's equity. When cash runs short, the seller is the first lender to go without.
The buyer's cash has no claim at all. It collects what is left after every lender is paid, and it loses first in a bad year.
A file where the top layer went unverified
In August 2020 the SBA's Office of Inspector General reported on a 7(a) loan made to buy a business and pay for working capital and closing costs (SBA OIG Report 20-18). The report's figures:
| Line | Amount |
|---|---|
| Loan approved | $2,939,000 |
| Cash injection the loan authorization required | $384,895 |
| Part of that injection the lender's file supported | $8,500 |
| Said to come from the buyer's bank account | $250,000 |
| Balance on that account's bank statement | $191,823 |
| Said to come from the sale of a rental property | $126,395 |
| Payments the borrower made before default | Four |
| SBA's payment on its guaranty | $2,077,766 |
| Recovery the Inspector General recommended from the lender | $2,094,574 |
For the bank-account money, the file held a statement whose balance fell short of the transfer and a wire transfer agreement, but nothing showing the money leave the account. Proof of arrival was a printout. It was said to be the closing attorney's account and showed no account number and no owner's name. For the rental-sale money, the file held the sale's settlement statement, and the same printout listed that wire as pending on the day of closing. The Inspector General found that the lender had not verified the buyer's cash before disbursing the loan, as the SBA's procedure then required. SBA agreed to ask the lender for documents that would bring the loan into compliance and to seek recovery if none arrived.
One made-up purchase, funded three ways
Sample figures, made up: a buyer pays $1,200,000 for a service company with no real estate, plus $100,000 for closing costs and working capital, so the total project costs $1,300,000. Over the last full year the business earned $240,000 before interest, taxes, depreciation and amortization, the cash-flow figure Appendix 15 divides by the debt payments. The 10 percent bank rate is an assumption chosen to keep the arithmetic readable, and loan fees are left out.
Under Appendix 15 the buyer contributes at least $130,000, and a seller note on full standby can supply no more than $65,000 of it.
- Stack A, bank and buyer. The buyer brings $130,000. An SBA 7(a) loan covers $1,170,000 over 10 years at 10 percent.
- Stack B, bank, buyer and a standby seller note. The buyer brings $65,000. The seller lends $65,000 on full standby, with no payments of any kind for the life of the SBA loan and interest accruing at 6 percent. The SBA loan is $1,170,000.
- Stack C, bank, buyer and a seller note paid monthly. The buyer brings $130,000. The seller lends $240,000 at 7 percent, paid monthly over 7 years. The SBA loan is $930,000.
| Line | Stack A | Stack B | Stack C |
|---|---|---|---|
| Buyer's cash | $130,000 | $65,000 | $130,000 |
| SBA loan, 10 years at 10% | $1,170,000 | $1,170,000 | $930,000 |
| Seller note | None | $65,000 on full standby at 6% | $240,000 at 7% over 7 years |
| Debt payments in year one | $185,540 | $185,540 | $190,947 |
| Coverage at $240,000 of cash flow | 1.29 | 1.29 | 1.26 |
| Coverage if cash flow falls 20% | 1.03 | 1.03 | 1.01 |
| Average interest rate on the debt | 10.0% | 9.8% | 9.4% |
Coverage is the year's cash flow divided by the year's debt payments. The new procedure's Appendix 15 sets the minimum at 1.25 for an initial acquisition, measured on the last fiscal year or the average of the last two, and the earlier procedure sets a general minimum of 1.15 (SBA Standard Operating Procedure 50 10). The new procedure applies to applications that receive an SBA loan number on or after October 1, 2026 (SBA Information Notice 5000-880695).
What the three stacks show
In the example, all three stacks clear 1.25 at $240,000 of cash flow. A 20 percent drop leaves each one between 1.01 and 1.03, enough to make the payments with almost nothing left for the owner.
Stack B halves the buyer's cash and leaves the bank payment exactly where it was. The seller carries the difference: $65,000 that produces no cash for ten years. If the note lets interest accrue and compound once a year at 6 percent, the balance reaches about $116,405 before the first payment is due, and the seller stands behind the bank for all ten years.
Stack C has the lowest average rate. It also has the thinnest coverage, because a 7-year seller note pays down faster than a 10-year bank loan: moving $240,000 from the bank to the seller raises year-one debt payments by about $5,400. The seller is repaid sooner, and the business carries its heaviest payments in its first seven years under a new owner.
Stacks A and B leave the same room in a bad year, 1.03. In Stack A the buyer puts up the second $65,000; in Stack B the seller does.
Points each layer settles
Each layer's documents, read from the bank loan up, settle five points:
- What is the payment each month, and in which month does it start?
- What does this lender hold if the payments stop: a lien on the assets, a personal guaranty, or only a promise?
- Whose permission does this lender need before it acts, and who needs its permission?
- How does this layer end: a final scheduled payment, a balloon, or a refinance?
- What does the full stack look like if cash flow falls by a fifth?
Three ways a stack gets misread
- A standby note counted as the buyer's cash. It meets the lender's equity rule. It is still a debt the business owes, with interest building, due after the lender is paid.
- Coverage read from one good year. The SBA's change-of-ownership appendix lets the lender use the last fiscal year or an average of two, and a buyer can run the worst of the last three years through the same table.
- The personal guaranty left out. Every individual who owns 20 percent or more of an SBA borrower signs an unlimited full guaranty, so the bottom layer can reach the buyer's personal assets although the buyer's cash sits at the top (SBA Standard Operating Procedure 50 10 8.1, guaranty requirements).
The standby rules have their own guide: how a seller note works inside an SBA acquisition loan.
Sources
- U.S. Small Business Administration, Standard Operating Procedure 50 10, Lender and Development Company Loan Programs: version 8.1 with Technical Policy Updates (published September 25, 2026, effective October 1, 2026) and version 8 (effective June 1, 2025): 8.1 Appendix 15 (equity injection for an initial acquisition, standby and seller debt, debt service coverage) and the guaranty requirements; the general 1.15 coverage minimum in version 8. Accessed 2026-09-27.
- U.S. Small Business Administration, Information Notice 5000-880695, Issuance of SOP 50 10 8.1, published August 14, 2026: which applications each version covers. Accessed 2026-09-27.
- U.S. Small Business Administration, Form 155, Standby Creditor's Agreement: subordination and the 15-day turnover of payments. Accessed 2026-09-27.
- U.S. Small Business Administration, Office of Inspector General, Report 20-18, High Risk 7(a) Loan Review Program, August 25, 2020. Accessed 2026-09-27.