The SBA Seller Note Has Two Layers. Most Buyers Are Only Using One.

This Week in ETA:

This LinkedIn post from Minds Capital caught my attention this week. The argument: private credit and SBICs are facing a deal flow crunch, and the consequences of too much capital chasing too few deals may be coming.

It's a dynamic worth understanding if you're a searcher looking for debt financing (particularly private debt). When lenders compete aggressively for volume, underwriting standards tend to drift. The incentive structure makes it worse, since many originators are paid on loans made, not loans repaid.

For now, more lenders competing for your deal is mostly good news for borrowers. But the flip side is real: a wave of loosely underwritten loans doesn't stay quiet forever, and the borrower can end up paying the biggest price via a defaulted loan.

Something to keep an eye on as you structure your deal.

Partner Perspective:

Matthias Smith, Pioneer Capital Advisory: The SBA Seller Note Has Two Layers. Most Buyers Are Only Using One.

One of the most consistent patterns I see across the dozens of pre-LOI calls I take every month is buyers and their advisors treating the seller note as a single, uniform instrument. It is not. Since the June 2025 SOP 50 10 8 update, there are effectively two distinct seller note instruments available in SBA acquisitions, governed by different rules, with different structural flexibility and different implications for your deal. Conflating them costs buyers negotiating leverage, strains seller relationships, and in some cases produces structures that either fail underwriting or leave real value on the table.

Here is a precise breakdown of how they work.

Layer One: The Equity-Qualifying Seller Note. The SBA requires a minimum 10% equity injection into the total project cost, which includes the purchase price, closing costs, working capital, and other eligible uses. Your personal cash is the most straightforward way to satisfy this. But under the current SOP, a seller note can substitute for up to half of that required injection, meaning up to 5% of total project cost. The trade-off is significant: that portion must be placed on complete full standby for the entire life of the SBA loan. No interest, no principal payments, nothing, until the SBA note is fully satisfied. On a 10-year SBA loan, that is a long commitment to ask of a seller. On a $3M total project cost, for example, up to $150K of seller note can count toward the required $300K equity injection, but it sits completely dormant for a decade. Buyers who understand this can use it strategically when personal liquidity is tight. Buyers who do not often either overpromise on its use or run into lender pushback during underwriting when the full standby requirement surfaces as a surprise.

Layer Two: The Seller Note Above the Equity Floor. This is where most of the confusion lives, and where most of the opportunity is. Any seller financing above that initial 10% equity floor, whether it is helping bridge a price gap, managing customer concentration risk, replacing a noncompliant earnout, or smoothing a seller's cash out timeline, is a separate instrument with far more structural flexibility. It is not subject to the full standby requirement. It can carry interest. It can amortize. It can be structured as interest only with a balloon. It can be forgivable, tied to revenue or EBITDA benchmarks post close. It can run for a shorter term.

What makes this concrete is the actual SBA paperwork. Every seller note in an SBA transaction, regardless of which layer it sits in, requires the seller to sign SBA Form 155, the Standby Creditor's Agreement. This is a standard two-page SBA document in which the seller formally agrees to the payment terms and subordinates their position to the SBA lender. What most people do not realize is that Form 155 does not have a single checkbox. It has four. The seller can agree to: (1) accept no payments whatsoever until the SBA loan is fully satisfied; (2) accept interest only payments at a specified rate with no principal; (3) accept full principal and interest unless the lender instructs them to stop; or (4) begin full principal and interest payments on a specific future date. Option one is the full standby required for the equity-qualifying layer. Options two through four are the tools available for Layer Two. The form itself is the clearest illustration I can give that standby is not binary. It exists on a spectrum, and the lender controls which box gets checked. Understanding this before LOI means you can negotiate seller note terms that are actually achievable. Agreeing to terms in an LOI that conflict with what your lender will approve on Form 155 is a common and avoidable source of late-stage deal friction.

Lenders will still underwrite any seller note carefully regardless of which layer it occupies. A note with active debt service hits your debt service coverage ratio and needs to be modeled; accordingly, a full standby note does not. True contingent earnouts are not SBA compliant, but forgivable seller notes tied to performance benchmarks are, and they are a powerful tool for deals where a key customer, key employee, or revenue trajectory needs to be protected post close. I have seen buyers leave significant negotiating room on the table by not knowing the options on this form, and I have seen deals come apart because sellers were asked to commit to terms that the lender's Form 155 ultimately would not allow.

If you are approaching a letter of intent and seller financing is part of your capital stack, the question to ask is not just how much seller note, but which layer is this note serving, and what payment structure is actually available to the seller under the lender's Form 155. Getting that wrong after the LOI is signed is one of the more painful and avoidable moments in an SBA deal process. At Pioneer Capital Advisory, we engage pre-LOI specifically so that structure decisions like this are pressure-tested before the ink is dry. We have helped close over $303M in SBA 7(a) acquisition financing across 137 transactions since 2022. If you are approaching a letter of intent and want to run your seller note structure by someone who has seen how lenders will underwrite it and what Form 155 will actually look like at closing, reach out to our team at [email protected]. There is no cost to the buyer.

Plus:

• Interested in learning how to raise capital for programmatic M&A? I’m speaking on a free webinar on April 16 at 10 CT on that very topic, alongside veteran acquisition entrepreneur Peter Lang. Register HERE.

• Jackie Hirsch is a well-respected SMB broker. She shared some valuable advice on what makes her take a searcher seriously - and what causes her to have pause.

• One trait predicts who finds a business to buy, raises the capital, and succeeds as an owner: Sales ability.

Question:

Hit reply and tell us - Are you approaching an LOI where seller financing is part of your capital stack? Hit reply and tell us how you're thinking about structuring it.