SBA Standby Notes: How They Work in Business Acquisitions
When the SBA finances a business acquisition, the lender often requires the seller to carry a portion of the purchase price on a standby note. The structure benefits everyone — the buyer reduces cash out of pocket, the seller demonstrates confidence, and the lender adds a cushion. Understanding the mechanics matters.
What 'On Standby' Means
A standby note is a loan from the seller to the buyer that is subordinate to the SBA loan and on which no principal or interest payments are made for a defined period — typically the first 24 months of the SBA loan term. Interest may accrue and be paid later, or be forgiven, depending on the negotiated terms.
Why Lenders Like It
A seller willing to wait 24 months for payment is signaling confidence that the business will perform. The standby note also gives the lender additional cushion: if cash flow tightens, the SBA loan is paid first and the seller waits.
Counting Toward the Equity Injection
In specific circumstances, a fully standby seller note can count toward the borrower's required equity injection. This is a powerful tool for buyers with limited cash, but lender practices vary on how — and how much — it counts.
Negotiating with the Seller
Sellers do not always agree to standby terms. The buyer's negotiating leverage comes from clearly explaining that the alternative — full cash at closing — may not be achievable, and that the standby allows the deal to actually close.
Educational content only — not advice. KQT Advisors, LLC is a commercial loan broker; we are not a lender, attorney, accountant, financial advisor, or fiduciary. We do not originate loans or make lending decisions. The information in this article is provided strictly for general informational and educational purposes and reflects our understanding at the time of writing. It is not — and must not be construed as — financial, tax, legal, accounting, investment, or any other professional advice, and creates no advisor-client relationship. Loan programs, rates, terms, eligibility requirements, fees, and approval criteria are set by individual lenders, the SBA, and other parties and are subject to change at any time without notice. Examples are illustrative only and not guarantees of outcome. Nothing here is a commitment to lend, an offer of credit, or a representation that any specific structure will be available to or appropriate for any borrower. Always consult your own qualified financial, tax, and legal advisors before acting on any information in this article. To the maximum extent permitted by law, KQT Advisors, LLC and its principals, employees, agents, and affiliates disclaim all liability for any direct, indirect, consequential, or incidental loss or damage arising out of any use of, reliance on, or inability to use the information in this article.