The SBA counts a seller note toward a buyer's required equity only when the seller agrees to full standby, meaning no payments of principal or interest for the entire term of the 7(a) loan, and even then the note can supply no more than half of the required amount (SBA Standard Operating Procedure 50 10 8.1, Appendix 15). A seller note paid on a normal schedule is allowed too; it counts as debt, and the business has to show it can carry it. This page states the SBA's published rules as general information, without advice on any one loan.
Which rulebook applies
SBA lenders work from a rulebook the SBA calls its standard operating procedure. The earlier version, procedure 50 10 8, has been in force since June 1, 2025 (SBA Standard Operating Procedure 50 10). The SBA's notice on the new one says procedure 50 10 8.1 applies to all applications that are issued an SBA loan number on or after October 1, 2026, and that lenders must keep using the earlier version for applications submitted through September 30, 2026 (SBA Information Notice 5000-880695). The first test runs on the loan number's date and the second on the submission date, and the notice does not say which version covers an application submitted by the end of September that receives its number in October.
What full standby means
Both versions define full standby the same way: no payments of principal or interest for the term of the loan. The lender uses SBA Form 155, the Standby Creditor's Agreement, or its own equivalent, with a copy of the seller's note attached (SBA Form 155). On Form 155 the seller agrees to:
- take no action to enforce the note until the lender's loan is satisfied, and no action against collateral without the lender's written consent;
- sign whatever the lender needs to put the seller's security interest behind the lender's loan;
- turn over to the lender, within fifteen days, any payment received in breach of the agreement.
Interest can keep building while the note waits. The SBA's change-of-ownership appendix lets standby debt accrue interest, add it to the balance, and amortize the total after the SBA loan is paid in full. The same appendix caps the amortization of a change-of-ownership loan at 10 years, with longer terms only for the real estate share of a loan or for special purpose property, so when no real estate is in the loan a standby seller can wait up to a decade for the first payment (SBA Standard Operating Procedure 50 10 8.1, Appendix 15, loan terms).
How much of the equity a standby note can cover
For an initial acquisition, which the new procedure defines as a purchase that leaves a new majority or largest owner who was not already an owner, or who has worked at the business for less than 24 months, the equity requirement is 10 percent of the total project cost, meaning everything it takes to complete the purchase (SBA Standard Operating Procedure 50 10 8.1, Appendix 15). The new procedure forbids reducing or waiving that requirement for an initial acquisition and treats a standby seller note as a limited source that can supply no more than half of it. The earlier procedure calls for at least that much, with the same half limit, for a complete change of ownership.
The purchase and every number in this example are made up.
| Line | Amount |
|---|---|
| Purchase price | $1,200,000 |
| Closing costs and working capital | $100,000 |
| Total project cost | $1,300,000 |
| Required buyer equity, 10% | $130,000 |
| Most a standby seller note can supply | $65,000 |
| Least the buyer brings from other eligible sources | $65,000 |
| SBA loan if the seller note supplies its full share | $1,170,000 |
The phrase "5 percent down" describes this arithmetic. The buyer's own cash is 5 percent of the project, and the seller carries the other 5 percent, unpaid, behind the lender, for the life of the loan.
When the equity is not documented
In September 2019 the SBA's Office of Inspector General published its review of eight 7(a) loans of $500,000 or more that defaulted within 18 months of first disbursement (SBA OIG Report 19-22). Six of the eight financed a change of ownership. Two of those six had files that did not support the buyer's equity injection:
| Loan in the report | Deficiencies the Inspector General found | SBA paid on its guaranty | Recovery recommended from the lender |
|---|---|---|---|
| Loan 1, change of ownership | Inadequate review of the franchise agreement, no business valuation, inadequate support for the equity injection, inadequate appraisal, unsupported projections | $3,024,679 | $3,000,297 |
| Loan 6, change of ownership | Inadequate support for the equity injection (the only deficiency found) | $733,031 | $691,715 |
The report notes that the SBA is released from its guaranty, in whole or in part and at its discretion, when a lender misses a material program requirement, so the recovery falls on the lender. SBA agreed to ask the lenders for documents or seek recovery. The report's table names the deficiency, not where the equity was meant to come from, so it does not show whether a seller note was part of either injection.
Seller notes that are paid normally
A seller note can be paid monthly alongside the bank loan instead of waiting. It then counts as debt, and the new procedure's change-of-ownership appendix applies three rules to it:
- It counts in coverage. The lender divides the business's earnings before interest, taxes, depreciation and amortization by all its debt payments after the purchase, seller note included. The minimum is 1.25 for an initial acquisition and 1.15 for a business expansion. The earlier procedure sets a general minimum of 1.15 for every applicant.
- Interest-only notes are tested as if they amortize. When other purchase debt that is not on full standby pays interest only, the lender applies an amortization of no more than 10 years in the test.
- Total debt has a ceiling. All the debt supporting the purchase, including a seller note that is not on full standby, is limited to the business valuation amount.
Refinancing has its own clock. A seller note from the purchase can be refinanced with SBA money only after it has been in place and current, and not on standby, for at least 36 months under the new procedure, against 24 months under the earlier one (SBA Standard Operating Procedure 50 10).
Other rules a seller meets in an SBA deal
- No earnouts. Both versions prohibit seller earnouts in a change of ownership. A buyer rebate tied to the business's performance is allowed, and under the new procedure the rebate goes to paying down the principal of the SBA loan.
- No staying on as an employee or owner. In an initial acquisition or a business expansion, the seller may not remain as an officer, director, stockholder or employee. The business may hire the seller as a consultant for up to 24 months in total under the new procedure, and for up to 12 months under the earlier one (SBA Standard Operating Procedure 50 10).
- No equity alongside a standby note. Under the new procedure the provider of standby debt may not also take an equity investment in the business.
What changes when the new procedure takes effect
| Rule | Procedure 50 10 8 (applications submitted through September 30, 2026) | Procedure 50 10 8.1 (loans numbered on or after October 1, 2026) |
|---|---|---|
| Minimum equity | At least 10% of total project cost for a complete change of ownership | 10% of total project cost for an initial acquisition (a new majority or largest owner), and it cannot be reduced |
| Standby seller note as equity | Full standby for the life of the loan, at most half the requirement | The same |
| Refinancing a seller note from the purchase | After 24 months in place and current | After 36 months in place and current |
| Seller as consultant after the sale | Up to 12 months | Up to 24 months |
| Where the purchase rules live | Spread across the chapters | Collected in Appendix 15, with four types of change of ownership |
When the standby surprises someone
When the buyer needs the note to reach the equity floor and the purchase agreement says nothing about standby, the seller learns from the lender's approval that the note will take no payments for the life of the SBA loan. A purchase agreement that states whether the note is on standby puts that term in writing before the lender's approval does.
In the example above, "5 percent down" leaves the bank payment and the coverage exactly where they are with $130,000 down. The difference is a $65,000 debt to the seller, growing with interest, that comes due after the bank is paid.
On a loan numbered on or after October 1, 2026, a plan to refinance the seller's note at month 24 is a year early, because the new procedure asks for 36 months.
A lawyer reading the note and the standby agreement for a buyer or a seller settles three questions:
- When do payments on the note begin?
- What interest builds until then, and does it compound?
- What can the seller do if the business is sold or stops paying the lender?
The seller's side of the same note is in carrying a note when you sell your business.
Sources
- U.S. Small Business Administration, Information Notice 5000-880695, Issuance of SOP 50 10 8.1, published August 14, 2026: effective date and which applications each version covers. Accessed 2026-09-27.
- 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): procedure 50 10 8.1 Appendix 15 (equity requirements, limited equity sources, standby debt, seller debt, debt service coverage, amortization of other purchase debt, total debt limit, refinancing after 36 months, earnouts and rebates, seller employment, loan terms) and procedure 50 10 8 (the 10 percent and half limit for a complete change of ownership, refinancing after 24 months, the 12-month consultant limit, the general 1.15 coverage minimum, the June 1, 2025 effective date). Accessed 2026-09-27.
- U.S. Small Business Administration, Form 155, Standby Creditor's Agreement: what the standby creditor agrees to. Accessed 2026-09-27.
- U.S. Small Business Administration, Office of Inspector General, Report 19-22, Consolidated Results of the OIG High Risk 7(a) Loan Review Program, September 26, 2019. Accessed 2026-09-27.