For SBA lenders
Short answer
Yes, it is permissible for accrued interest on a seller note on full standby to capitalize or compound, provided the standby agreement explicitly states this and no payments (principal or interest) are made during the standby period.
While no payments can be made on a full standby note, the interest can still accrue and, if stipulated, capitalize or compound. This means the unpaid interest is added to the principal balance, increasing the total amount owed to the seller at the end of the standby period. This must be clearly outlined in the standby agreement.
A seller note for $200,000 at 5% interest is on full standby for 5 years. The standby agreement states that interest will accrue and capitalize annually. At the end of year 1, $10,000 in interest is added to the principal, making the new principal balance $210,000 for year 2's interest calculation.
Insider move
Lenders must ensure the standby agreement clearly defines whether and how interest accrues and capitalizes. This affects the total obligation to the seller post-SBA loan repayment and impacts future business cash flow.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
More on standby agreements
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